Image - 120 day record of the dollar against the euro, ending 23rd March 2003 - Note the slight, and probably temporary, recovery caused by the second Gulf War

... And the international monetary system falls into crisis - We are publishing a text from the January edition of Battaglia Comunista, the monthly paper of our sister organisation in Italy, the Partito Comunista Internazionalista. Since the text was written, the downward trend of the dollar has continued and at the start of March 2003 it stood at $1.10 to the Euro.

Having trod the other currencies underfoot for years, the US currency has began a precipitous decline which doesn’t seem to be destined to stop; rather, according to analysts, the dollar is fated to be further devalued in the course of 2003. As to what the economic and financial factors which are pushing the dollar downwards are, bourgeois economists, as is often the case, are rather imprecise and grasp only the superficial aspects of the phenomenon, undervaluing the fact that currency dynamics represent only an aspect of the changes underway in the interimperialist relations between the most advanced areas of the world.

We start with a simple fact. The relationship between the dollar and the euro has completely reversed over the last 24 months. At the start of 2001, $0.81 was enough to obtain a euro, while at the start of February 2003, $1.08 was needed to acquire one. We are witnessing a devaluation of the dollar of more than 20% which cannot be justified by an improved situation for the real economies of the euro countries. Instead, in the same two years, the European economy has suffered a strong deceleration, to the extent that countries like Italy had, in that period, a growth in GNP which was close to zero. Germany and France have done a little better, as they have, thanks to the devalued euro, made up for the contraction of their internal markets by increasing the export of their goods to Asian countries and to the United States. By exploiting the weakness of the euro, the two most important countries in the European Union have succeeded in floating above the line of the recession, registering annual increases of more than 1% in GNP.

On the other shore of the Atlantic, the American economy in parallel with the European one has suffered a brusque slowdown. The tragic events of 1 1th September 2001, despite the hammering insistence of bourgeois propaganda that locates in them the cause of the crisis of the world economy, are totally extraneous to the collapse of the new economy and the bursting of the speculative bubble which has seen the Nasdaq index on the New York stock exchange go down like a lead balloon. Capitalism’s economic crisis has rather different origins, finding its mechanisms in the contradictions of the capitalist mode of production. In comparison with the old continent, in recent months the United States has enjoyed a more dynamic economic situation in that its growth in GNP for 2002 was 2%, well above the European average. The causes of the decline of the dollar are therefore not to be sought in a superior European economic situation, but in the contradictions which have accumulated in recent years in the heart of US imperialism and in the forms of its domination.

In order to understand the dollar’s present decline, it is first necessary to comprehend the dynamic which has led the American currency to be highly valued in comparison to the other currencies over the last few years. As well as being the most important currency in the international monetary system, that which is most used in international exchange and as a reserve of value for the various central banks, the dollar, over the last few years, has gained in value with respect to the other currencies, chiefly due to the enormous mass of foreign capital which flowed onto the New York stock market. The exponential growth of the Dow Jones and Nasdaq indices at the end of the ’90’s, which occurred, in good part, due to the inward flow of foreign capital, had as a consequence a revaluation of the dollar above all the other currencies. The large international investors, from Europe and Asia, invested their capital on the US market to acquire shares in American companies and to place it in fixed-rate stock, such as Treasury Bonds. The devastating crises which hit Mexico, Brazil, the so-called Asian Tigers, Russia, Turkey and, most recently, Argentina, fed, to a certain extent, the flux of capital towards the US. The solidity of the US economy and the fact that it constituted the safest place of the various stock markets in the world for their investments in periods of crisis, fed the flow of capital from abroad, despite interest rates lower than elsewhere. As well as supporting the dollar exchange rate, the flow of capital from abroad served, in this period, to compensate for the enormous indebtedness of the American economy. The US commercial deficit exceeds $450bn per year, while, after a few years of being substantially in balance, in the last 20 months the federal deficit too has reappeared in all its “glory”, thanks to rearmament programmes and the support given to the sectors of the economy most linked to war industries.

The presence of a double deficit, commercial and federal, is not an entirely novel event in the recent economic history of the United States (the two deficits already co-existed in the Reagan years), but, in the present international context, they could represent an explosive mixture sufficient to tip the American economy into an unprecedented spiral of crisis. The dollar is being devalued primarily because the mechanisms which previously caused it to be highly valued are exhausted. Capital from abroad is no longer arriving, the books can no longer be successfully balanced in the face of the massive commercial and federal deficits, and consequently the dollar is falling. The effects of the fall in value of the dollar could, theoretically, be beneficial for the real US economy, in that it should make US goods more competitive on international markets. But, observing the details of the dollar’s dynamic with respect to the currencies of the countries which are the largest exporters to the US (above all, China, which has become one of the largest exporters to the US), it can be seen that the greenback has not fallen so much in that context. On the other hand, it is with respect to the euro that the dollar has weakened, but, from a commercial point of view that does not represent a great advantage for the US. For some European countries, imports from the US are destined to fall. The latest data, published at the start of February, shows that in Germany, precisely because of the revaluation of the euro, external orders for January have fallen 8.7% with respect to those for December; if we take into account that it is exports which have dragged the European economy a little forward, then we can predict that the growth in GNP for 2003 will be very close to zero.

The present devaluation of the dollar presents a few novelties in comparison with those of the past. It is a devaluation which does not stem from a decision by the US monetary authorities, or at least not just from such a decision, but from the massive shift of capital from the American towards the European market. It is a devaluation, in sum, which has happened more suddenly than is desired, which will do very little to relaunch the real economy and which risks the further reduction of the domination of the dollar over international currency markets. The presence of the euro is a fact of extraordinary importance from the point of view of interimperialist relations; if, in the past, the sole reference point in periods of crisis was represented by the dollar, now international investors sense in the new currency an alternative instrument to the dollar which offers the same guarantees in terms of the security of investment. If a country like China, which has the largest currency reserves in the world, has decided to sell dollars and replace them with euros, and thus diversify its own monetary reserves, then this means that we are witnessing a new fact which will have important repercussions on a world scale.

Finally, in order to estimate the difference between the present dollar crisis and those of the past, we note the pincer effect which has been created with the price of oil in the recent period. If, in the past, the price of oil rose, then, by the fact that this price was expressed in dollars, the US currency appreciated with respect to other currencies. Now, despite the threat of war (another element which in the past made the dollar appreciate), while the price of oil is tending to rise, the dollar is falling, all to the advantage of the euro. It is a sign that the times are changing and is evidence of the danger threatening the financial revenue that the US draws from its prerogatives, of that revenue shrinking ever more, and therefore of the need for the US to play the card of war to the fullest extent. Yesterday Afghanistan, tomorrow Iraq; but will that be enough?