(Este es el primer borrador de un paper para el MA en American Studies que estoy cursando en la Universidad de Amsterdam)
- De Gaulle and the Dollar: Are There Lessons to be Learned? (I) Agustin Mackinlay - MA programme in American studies, Graduate School for Humanities. Universiteit van Amsterdam. US – European relations. Lecturer: Prof. dr. Ruud Janssens.
This paper focuses on France's response to what Charles de Gaulle called "America's exorbitant privilege": the use of the US dollar as the key international reserve currency. After briefly reviewing the extent of de Gaulle's knowledge about economic and monetary issues, the main research thesis are developed: (a) France's bold security initiatives during the 1960s were matched by equally strong and well-prepared measures to undermine the dollar as the key reserve currency; (b) de Gaulle's focus on monetary issues enabled him to attract the attention of the Western world to the larger issue of the risks posed by America's political hegemony.
The paper then reviews de Gaulle's downfall from a "reserve currency" perspective, arguing that the Soviet occupation of Prague in August 1968 played an important role in the sudden demise of France's policy of grandeur. As shown in the conclusion, these issues have acquired a special relevance in recent years. The 2000s are, in many ways, a reflection of the 1960s. Thanks to the "magic" of the US dollar, China today finances America's war in Iraq -- just as Japan and Germany financed the Vietnam war forty years ago. Both periods saw the enactment of large tax cuts in the United States, coupled with unprecedented increases in public spending.
And in both periods, many Europeans reacted strongly against America's unilateral military actions.But Charles de Gaulle did make a difference – and an individual of comparable political standing has yet to emerge in the 2000s horizon. De Gaulle displayed great skill in orienting France’s policy towards the United States, especially from 1958 to 1967. Most economic historians see his mark in what eventually became known as the European Monetary Union (EMU). Thus, this paper ends by sketching a response to a question famously phrased by Henry Kissinger: What would de Gaulle say in present circumstances?
De Gaulle: economics and monetary policy
Before reviewing de Gaulle's policy on the international financial system, we need to briefly discuss his views about economics and monetary policy. What was the extent of his knowledge? Did de Gaulle have strong personal convictions on matters related to monetary and economic problems? Or did he blindly rely on his advisors?
Opinions are divided. In late 1968, as de French president stubbornly refused to devalue the franc, Peter Kenen stigmatized de Gaulle's "disdain for economists and for the facts of economic life." The title of his article was: "The General's Monetary Absurdity" (1). Other skeptics refer to the role of de Gaulle’s advisor Jacques Rueff, one of the architects of the successful stabilization plan of 1958. According to Jean Lacouture, the Général was "évidemment endoctriné par son ami Jacques Rueff" (2). In June 1965, the French ambassador in Washington called on one of President Johnson’s advisors, telling him that de Gaulle "has just Mr. Rueff" to rely upon (3). Ironically, the most devastating comment on this count comes from de Gaulle's own inner circle. In his well-known volumes of notes, published under the title C'était de Gaulle, Alain Peyrefitte has Georges Pompidou pronounce these blunt words:
"L'imagination du Général, ce sont les idées de Jacques Rueff ... Il profite de la naiveté du Général dans ce domaine. Il le pousse en avant comme on pousserait un rhinocéros dans un magasin de porcelaine." (4)
Other accounts, however, offer a far more benign view of de Gaulle's knowledge about economic issues. David Calleo, referring to the famous press conference of February 1965, praises de Gaulle's concern with international monetary relations, and says that one should no be surprised by "his mastery of the technical issues." And he adds: "De Gaulle was often said to be uninterested in economics, but any survey of his public utterances shows him to have been greatly preoccupied with economic issues." (5)
Confirming Calleo's views, Paul-Marie de la Gorce describes de Gaulle's economic conceptions as “precise enough to inspire a policy". And he quotes de Gaulle’s own words in Mémoires d'espoir (1970):
"A la tête de la France, dans le calme ou dans l'orage, les problèmes économiques et sociaux ne cesseront jamais d'être au premier plan de mon activité comme de mes soucis. J'y consacrerai une bonne moitié de mon travail, de mes audiences, de mes visites, de mes discours." (6)
Serge Berstein, approvingly citing the same passage, adds: "Economic and social worries have always been at the heart of his political action." (7) Furthermore, Berstein contrasts de Gaulle’s ideas in the monetary realm with the prevalent –and largely Keynesian- view of money as a tool to promote economic growth. Money, according to de Gaulle, was a far more complex phenomenon:
"La monnaie, critère de la santé économique et condition du crédit, dont la solidité garantit et attire l'épargne, encourage l'esprit d'entreprise, contribue à la paix sociale, procure l'influence internationale, mais dont l'affaiblissement déchaine l'inflation et le gaspillage, étouffe l'essor, suscite le trouble, compromet l'indépendance…" (8)
In a paper about de Gaulle’s policy of grandeur in the context of the EEC, Andrew Moravcsik goes one step further. He argues in favor of a radical re-interpretation of Gaullist policy - - one that would put economics at the forefront. Moravcsik refers to de Gaulle's "concrete commercial considerations" as the "neglected dimension of Gaullist policy." Marc Trachtenberg, commenting the paper, concedes that in "the text of his January 1963 statement explaining France's veto of British EEC membership, de Gaulle referred more to economics than to politics." (9)
To sum up, Pompidou's very negative view of de Gaulle as an economist –un rhinocéros dans un magasin de porcelaine- does not seem to be supported by the evidence. Other passages from Peyrefitte's notes clearly show that Pompidou was more exasperated by Rueff –whom he disdained as a mere theorist- than he was fearful about the General's knowledge. In fact, de Gaulle had very clear notions about domestic economic recipes, especially from 1958 onwards: have a strong and stable currency, pay attention to budget deficits, favor competition (10). De Gaulle's somewhat anachronistic attachment to the Plan may be seen as a reminder of how much the Great Depression still affected statesmen of the era. In the international arena, as the financial system went from crisis to crisis in the 1960s, de Gaulle was less clear about what he wanted. But he knew very well what he did not want: a system dominated by the US dollar.
De Gaulle and the international monetary system: the all-important February 1965 press conference
This section deals mainly with the contents and repercussions of Charles de Gaulle’s famous press conference of February 4, 1965, in which he dealt a major blow to the international monetary system based on the US dollar. With the Algerian crisis behind him, strengthened by the great success of the French economic stabilization plan launched in 1958, the moment had come for de Gaulle to aim precisely at the point where the Americans were the most vulnerable.
Already in 1963 President Kennedy had stated that "The US military position is good but our financial position is vulnerable." (11). Accordingly, de Gaulle chose the realm of international monetary affairs to produce what de la Gorce calls the most "innovative and radical" critique of the established world order. Not even his well-known positions on NATO, Vietnam, Québec or Israel –says the biographer- ever created more fuss. This view was shared by Hervé Alphand, the French ambassador in Washington:
"Au fond, dans toutes ces 'crises' entre de Gaulle et les Américains, il n’y en a qu’une qui m’ait rendu difficile d’assumer mon rôle de trait d’union entre la France et les États-Unis: celle du dollar. Là, j’ai senti les Américains frappés au plus profond" (12)
The February 1965 press conference was not a sudden outburst of anger aimed at the United States and its currency. De Gaulle was not given to improvise on such important matters. Rather, the press conference was the culmination of a well-prepared plan of action that included concrete steps for reform. Any serious critique had to be followed, in de Gaulle's mind, by practical proposals. We can reconstruct the events that led to that memorable event by following de la Gorce and Morse -- and the very illustrative papers of Presidents Kennedy and Johnson. Before doing that, however, we need to put these events in their proper context with a brief, non-technical account of the international monetary system.
The international monetary system: 1958-1965
After 1945, capitalist economies were using the dollar as the key currency because it was the only monetary unit with enough gold backing to be acceptable both for international transactions and reserve purposes. With official gold holdings of all countries (excepting the communist bloc) valued at $33.1 billion, the US held as much as $20.1 billion in reserves. The United States, committed to keep the gold price at $35 an ounce, was the only significant provider of financial liquidity to the devastated economies of Europe and Japan. The system, called the Gold Exchange Standard, was complemented by the International Monetary Fund, whose main task was to ensure the stability of the fixed-exchange rate system between the dollar and the other major currencies.
By 1958, however, just as de Gaulle was launching the highly successful Pinay-Rueff economic stabilization plan, America registered its first balance of payments deficit. From there on, matters tended to deteriorate, and deficits began to assume major proportions. In 1959, the United States lost $1.1 billion of gold. The 1960 gold loss spiraled to $1.7 billion (13). President Kennedy sent a special message to Congress on "Gold and the Balance of Payments Problem" in February 1961, declaring that "this loss of gold … concerns the free world" (14). De Gaulle began to act after receiving a letter from Jacques Rueff on May 5, 1961. What was on Rueff's mind? In July of that year, the French economist published an article in the American business magazine Fortune, describing the international monetary system as a "childish game" (15).
Rueff's early critique retains much of its validity in 2004 – as China today finances the US budget deficit with its huge purchases of US Treasury securities. Under a classical gold standard system, Rueff argued, countries with trade deficits are forced to adjust their spending because surplus countries retrieve the gold due to them in the form of payments. As gold flows out from deficit countries, the amount of money in circulation declines, leading to higher interest rates and to diminished spending. But Rueff saw that under the monetary regime in place since 1945, surplus countries could opt to hold US dollar-denominated Treasury bonds instead of gold - - or they could be "politely" told to do so. Thus, the United States had the luxury of being in a position to avoid economic adjustment in spite of its deficits, because surplus countries would buy US bonds instead of aggressively retrieving gold.
This is what Rueff called the exorbitant privilege of the United States: the power to issue the key reserve currency and to forego adjustment. It was a game that could only end in tears – or in sustained inflation.
De Gaulle in action
De Gaulle decided to act on two fronts. On the one hand, he ordered the Banque de France to annually convert its international reserves into gold at a more sustained rate than other EEC central banks. In 1958, 71.4% of the bank’s reserves were held in gold; by 1967, the proportion had risen to 91.9%, against an average of 78.1% for the EEC central banks (16). On the other hand, he summoned a special conseil interministériel to discuss international monetary problems in July 1963, just as President Kennedy was sending a new special message to Congress on the balance of payments (17).
Another high-level meeting three months later at the Elysée Palace ended with the recommendation given by de Gaulle to his advisor Guillaume Guindey to come up with suggestions for a comprehensive reform of the international monetary system. By June 1964, Guindey was proposing the creation of a new collective reserve currency to be managed with the "unanimous consent of principal states."Meanwhile, the situation was not improving in the United States. The tax cut of 1964 and the increase in public spending (due to the war in Vietnam and to Johnson's Great Society), were putting more pressure on the state of American finances.
European economies, on the other hand, were going from strength to strength. French output, having registered a healthy 6.3% gain in 1963, grew by a staggering 7% in 1964. That year, investment surged forward and exports outgrew imports.The French economy was on a solid footing, even after the restrictive measures of Finance minister Valéry Giscard d’Estaing's "stabilization plan" of 1963. De la Gorce says that full employment was the norm (18). It is therefore no coincidence that by 1965 –as Henry Kissinger was publishing Troubled Partnership, his book about NATO-, France was openly questioning Washington's policies in both the military and the financial areas. Gone was the weakness of the immediate post-war years!
The press conference
In was in this context of relative European economic strength vis-à-vis the United States that de Gaulle dropped the "monetary bomb" on February 4, 1965. The press conference that day saw Charles de Gaulle at his very best. He was calling for decisive action, yet he radiated calm and self-control. He was sharply criticizing the United States, yet he welcomed dialogue. It was a tough political game, but the Général was well prepared and he showed strong analytical skills. At the end of the conference, he was so pleased with his own performance that he asked one of his assistants: "Vous croyez que ça allait?"(19). Edward Morse provides a translation of the key statement:
"The conditions which formerly were able to give rise to the ‘gold exchange standard’ have changed. The currencies of the Western European States are restored, to the extent that gold reserves of the Six today equal those of the Americans … This means that the custom of ascribing a superior value to the dollar as an international currency no longer rests on its initial foundation – I mean America’s possession of the largest share of the world's gold. This unilateral facility which is granted to America is serving to cloud the idea that the dollar is an impartial and international medium of exchange, when it is a means of credit belonging to one State … Gold has real value." (20)
Paul-Marie de la Gorce adds another important passage:
"La fin sans rude secousse du Gold exchange standard, la restauration de l’étalon-or, les mesures de complément et de transition qui pourraient être indispensables, notamment en ce qui concerne l’organisation du crédit international à partir de cette base nouvelle, devront être concertées posément entre les Etats, notamment ceux auxquels leur capacité économique et financière attribue une responsabilité particulière" (21)
These texts are remarkable for a number of reasons. First, the Gold Exchange Standard system was already extinct in de Gaulle's mind, because the conditions that had created it did no longer apply. Second, the use of the dollar as the key international currency was dismissed a mere "custom." In other words, it was not based on any substantial feature of the US currency. Third, the system amounted to a unilateral facility for the main benefit of the United States. Fourth, the management of a new system would have to be shared between the key countries.
To understand the shock created by these words on the other side of the Atlantic, we must look at statements from US presidents. President John F. Kennedy, who was assassinated almost a year and a half before de Gaulle's press conference, had attempted to present the dollar as a common good for the West as a whole. In a news conference held in July 1962, he stated that the dollar was "… the reserve currency of the whole free world” (22). In “Remarks to the Board of Governors of the World Bank and the IMF", in September 1962, Kennedy argued that the dollar was "… not only our national currency", but "an international currency." "If the dollar did not exist" –he proudly concluded- "it would have to be invented" (23). In a press conference on July 17, 1963, Kennedy emphasized the fact that "Quite obviously, the dollar is the international currency and has served us well, and served the West as well" (emphasis added) (24).
Thus, Kennedy would have been utterly dismayed by the Gaulle's statement about the dollar as a "unilateral" credit facility. A glance at the papers of President Lyndon B. Johnson shows that the situation in Washington was approaching the panic level in early 1965. On February 10, only five days after de Gaulle's press conference, Johnson sent a special message to Congress on the "International Balance of Payments." The message contained all the usual reassuring statements about the dollar, but with an interesting addition: "…we cannot –and do not- assume that the world's willingness to hold dollars is unlimited" (emphasis in original) (25).
A week later, Johnson was due for a speech at the National Industrial Conference Board. As he arrived late, he apologized by saying that he had just met former President Eisenhower, with whom he had discussed the balance-of-payments question. We can only guess, but de Gaulle must certainly have been on their minds. (26)
Following de Gaulle's press conference, tensions between the United States and France ran high for a while. The owner of the Boston building that housed the French consulate publicly demanded to be paid in gold. American consumer magazines were full of stories showing how the purchase of a French dress amounted to "a threat to the dollar." And many saw it as a patriotic duty to avoid France as a holiday destination (27).