Europe's Bankers and the Money War

...RESISTING THE CONNALLY DOCTRINE Europe's Bankers and the Money War BY ANDREW J. GLASS LONDON THE MERCHANT bankers of Europe are back in business, once more moving great pools of capital around the world in their unceasing search for profitable investments The sweeping Nixon monetary moves of mid-August compelled them to suspend operations for no more than a month Remarkably, the capital flows have resumed even though nothing has really been settled on the fiscal front No one yet knows the eventual extent of the dollar devaluation or what kind of international payments system will supplant the dollar-and-gold hybrid that had sufficed, more or less, since World War II Americans are accustomed to buying and selling goods in dollars, in the Umted States, exchange rates are viewed as a kind of nuisance one must put up with when traveling or doing business abroad For the Eu-lopean bankers, however, the rela-tive value of a nation's money lies at the core of things Nowhere is this more true than in the City, a complex of financial institutions clumped around the Bank of England and nestled between the Tower of London and St Paul's Cathedral (In world trade circles, the City mam-tains preeminence over New York and Zurich, and its stature will be further enhanced by Britain's expected entry into the European Economic Community in 1973 ) For the time being, the bankers are readily accepting the greater nsks of the unstable monetary situation and the higher commissions that go with them But this short-term accommodation masks then deep concern over the long-term course of American economic pohcy In particular, they fear that Treasury Secretary John B Connally has quietly persuaded the President to follow a neomercantilist course It is being said that the Connally Doctrine dovetails nicely with the protectionist outlook of organized labor in the United States and, indeed, may be part of an Administration package aimed at winning the support of union leaders for Nixon's Phase Two controls Describing his trade philosophy to Frank V Fowlkes of National Journal, Connally said "Above all else we have to protect our relative position We can't unilaterally engage in free trade We certamly don't want to be dragged down to the level of other nations, to the lowest common denominator, to the cheapest wages and the lowest standard of living " And on October 16 m Hot Springs, Virginia, speaking to the 110-member Business Council, the top stratum of corporate society, he stated that the U S had embarked upon "a war of competition and a war?economics' with its trading partners around the world "Retaliation is a two-way street [The United States] is the biggest market of them all " The basis of 17th-century mercantilist doctrine, like that of 20th-century Connally Doctrine, has, at first sight, a certain logic to it The mercantilists thought that a country's self-interest lay in the accumulation of a national treasure—mainly gold, which came in by selling goods abroad and was lost by buying goods abroad Hence, as Robert L Heilbroner has put it "The pursuit of national self-interest resided in policies that would encourage exports and discourage imports, thereby increasing the stock of piecious bullion " Gold, of course, bears no weight in Connally's aims, in fact, he would prefer to see less of a link between the dollar and gold, having taken the first step by unilaterally suspending their convertibility Yet national wealth, not gold, is at the heart of the mercantilist argument, and Con-nally's msistence that the U S must drastically reverse its balance-of-payments outflow, no matter what the cost, brands him a neomercan-tilist in European circles The London bankers see themselves as the spiritual descendants of David Ricardo, who m 1817 first stated his "law of comparative advantage," which he saw as "a fully rational international division of labor that will optimize" the world's productive resources The neo-Ri-cardigans argue that the Connally Doctrine fails to recognize that today's world economy is governed not by exports and imports but by 100 or so multinational corporations Since World War II, these have largely succeeded m putting both production and marketing on a global footing As the prime clients of the London bankers, the multinational corporations have continued to prosper and grow because they have been allowed relative freedom to move capital across national frontiers They are therefore directly threatened by the imposition of exchange controls and other limitations on credit and investment devised by governments to protect then national positions in any trade war In the opinion of the City, exchange controls are precisely where the Connally Doctrine winds up The irony is that most U S foreign investment is in such capital-intensive and high-technology industries as computers and automated machinery, very little is in labor-intensive industries of the kind that rankle the Treasury Secretary The output of these multinational plants seldom ends up in the lucrative U S market that Connally seeks to protect MOREOVER, multinationals are, like retaliation, a two-way street As Heilbroner points out, European-based multinationals have been expanding their output, in Europe and abroad, at an even faster rate than the total growth (in all markets) of the American-based multinationals Thus, while American corporate power challenges Europeans on the continent, the Europeans return the challenge everywhere else in the world, including withm the U S itself This is one reason why the Europeans are so upset with Connally's plan, now making its way through Congress, to restrict the new investment tax credit to Amencan-built capital goods The attitude in London, as well as on the Continent, is that European industry can surmount the 10 per cent import surcharge through credit preferences and other devices, all of which amount to an export subsidy Yet the projected tax credit is another story It evokes the kind of retaliatory talk that Connally is still confident he can avoid So far, the multinational corporations have managed to redefine world production, marketing and finance patterns without clashing directly with the interests of nation states In most cases, they have supported them In any event, multinational corporate managers tend to look beyond political institutions, which usually figure in their planning only in such marginal ways as tax preferences But this era may be coming to an end Many bankers here feel that the Nixon Administration s money troubles are of its own making One argument is that by retaining controls on the export ot investment capital, Washington has forced the multinationals to form new capital pools, such as the Eurodollar and Eurobond markets In the process, these corporations, once content to borrow out of reserves, have become astute international money managers It is said that much of the "hot money" that flowed into European coffers before August 15 was composed of the working cash balances of American-controlled multinational companies The money was sloshing across borders in search of security against devaluation At the moment, London bankers are still advising their clients to maintain minimum dollar balances This, in turn, puts further pressure on the European central bankers, who must hold the glut of dollars in their reserves while trying to negotiate an overall settlement with Connally The feeling here is that an agreement may be a long time in coming, and that it would be well to take some defensive moves An effort is being made to tie each of the major European currencies to the others within a very narrow band, perhaps plus or minus 5 per cent A separate parity would be worked out between the new Eurocurrency and the Japanese yen The Eurocurrency and the yen would then "float" jointly against the dollar in a much wider band, perhaps plus or minus 6 per cent from the nominal exchange rate In this way, the Europeans hope to insulate themselves as much as possible against the shock of the subsequent dollar devaluation they believe will occur...