Published by EH.NET (January 2004)

Francis J. Gavin, Gold, Dollars, and Power: The Politics of International Monetary Relations, 1958-1971. Chapel Hill: University of North Carolina Press, 2004. xiii + 263 pp. $45 (cloth), ISBN: 0-8078-2823-8.

Reviewed for EH.NET by Harold James, Department of History, Princeton University.

Francis Gavin has written a study of U.S. administrations and their approach to dollar politics between 1958 and 1968, when he identifies the suspending of the London gold pool in March 1968 as the effective end of the Bretton Woods system. From then, the world was on a dollar standard, and there were two separate prices for gold, one for the private market and one for official transactions. Events up to the better known crisis of August 1971, when the official dollar price of $35 an ounce was also ended, are treated only in a summary chapter. The major emphasis of this book is on how dollar politics and security politics interacted in the Kennedy and Johnson administrations, and in particular how a continual worry about balance of payments deficits forced the U.S. government to think about the reduction of military expenditure overseas, especially in Europe. One major theme is American-German negotiations about the “offset,” i.e. German spending on U.S. military products to counterbalance the cost to the United States of stationing troops in Germany, and pressure on the Bundesbank to hold dollar reserves. This, incidentally, has also been the subject of a fine study recently by Hubert Zimmermann: Money and Security: Troops, Monetary Policy and West Germany’s Relations with the United States and Britain, 1950-1971, New York: Cambridge University Press, 2002. The well known tensions between the United States and France and de Gaulle and Rueff’s criticism of the U.S.’s “exorbitant privilege” of forcing its dollars and deficits on the world are also examined in depth. Great Britain’s sterling crises and the relationship between strains on sterling (at that time the other major world reserve currency) and strains on the dollar are handled conventionally. Japan, which became a major focus of U.S. concerns right at the end of the decade, and especially in 1970 and 1971, is not treated in any depth. And Canada, which had abandoned a fixed exchange rate regime, is not treated at all, presumably because Gavin found no evidence that anyone ever thought of Canada’s non-compliance with Bretton Woods as a problem. There is also little discussion of the places where multilateral financial diplomacy took place: the G-10, the OECD’s Working Party Three, or the International Monetary Fund.

The evidence offered by Gavin about the state of thinking about the U.S. deficits is interesting. There is almost universal agreement among U.S. officials and policy makers that something is wrong. On the other hand, all the figures from the Kennedy and Johnson administrations will only think about flexible exchange rates in order to reject the suggestion (as for instance W.W. Rostow did). It is surprising that Gavin does not look at greater length at the debates among economists at the time, and about the arguments for free capital mobility and flexible rates. Milton Friedman is mentioned only in passing, and Gottfried Haberler, who headed a taskforce for the transition to the Nixon administration, not at all.

Gavin pitches his account as being at odds with the conventional wisdom on the subject. This sounds like a peculiar claim about modern economists’ discussion of the problems of Bretton Woods, where there is an almost universal consensus about the problems of the fixed exchange rate system and simultaneous capital flows (which started to develop on a large scale in the course of the 1960s). So most economists will say to this book: so what? On the other hand, he is probably right about many historians and political scientists, who have treated dollar politics under Bretton Woods as part of the exercise of U.S. hegemony and have essentially, since David Calleo and Robert Gilpin’s work, taken over the contemporary French criticism of Rueff and de Gaulle. In the context of this literature, it is helpful to see what U.S. policy makers were saying and thinking, and how worried they were by the inherent instability of their situation and the eventual likelihood of a dollar collapse. The exercise of linking discussions of security issues and economics and finance is also a welcome one. And the archival evidence (which provides the core of the book) is fascinating and well handled. There are some fascinating novelties: that at the end of his administration, President Eisenhower suggested replacing gold as the major measure of value with uranium and plutonium (p. 49). The idea was not taken seriously, but it does demonstrate something important about the gold standard of the past: that an ultimate source of value was the use of gold in providing a military use (to pay soldiers), and that in the modern world the military role was taken more and more by nuclear weapons.

But the heavy dependence on archives makes, I think, for a greater sense of crisis about the whole decade than is really warranted by a comparison of the 1960s with other eras. Policy makers live and breathe in a world of continual problems and crises: that is how they carve out their influence. Reading this book in 2004 for this reviewer has a paradoxically reassuring effect: that the policy-makers and journalists can be very worried, but the problems are still fundamentally manageable. I believe many readers will be struck by the similarity of many of the historical views recorded here with very contemporary debates. De Gaulle’s phrasing was very striking: “The United States is not capable of balancing its budget. It allows itself to have enormous debts. Since the dollar is the reference currency everywhere, it can cause others to suffer the effects of its poor management. This is not acceptable. This cannot last” (p. 121). The German government was perceived to be moving worryingly close to France. The U.S. government concluded that the Germans “can easily develop neuroses that can be catastrophic for all of us. They did it before and they can do it again. A neurotic, disaffected Germany could be like a loose ship’s cannon in a high sea” (p. 136). As a result the discussions between President Johnson and Chancellor Erhard were envisaged by officials as “one of the most important decisions the U.S. has faced in the postwar period” (p. 148).

Such language raises the important issue of whether we should take the crisis rhetoric at face value. There was not in the end any major clash in this case, at least not something that deserves to go into the textbooks. Erhard reached an agreement on the offset and the Bundesbank agreed not to convert dollars to gold. Six American divisions stayed in Germany and there were no troop reductions. There is also, perhaps surprisingly given the overall thesis of the book, no evidence that the financial worries, however acute they were, actually constrained U.S. geopolitical decisions. Was there even one fewer U.S. soldier in South East Asia as a result of concerns about the dollar? In the end, in that kind of debate, the security concerns overrode the financial debate. When modern neo-Gaullists use the words and thoughts of the General and say that U.S. deficits are not acceptable and cannot last, are they right or wrong? And over what time period is the appropriate calculation about “cannot last”? The major contribution of this book, in my opinion, is to draw attention to the relationship between the language of crisis in international monetary relations and the underlying economics which are not necessarily driven by political crisis.

Harold James is Professor of History at Princeton University and author of The End of Globalization (Harvard University Press, 2001) and International Monetary Cooperation since Bretton Woods (Oxford University Press, 1996).