The economic dimension of Cold War policy was not confined to penalizing Communist countries or rewarding those who resisted the embrace of the Soviet Union. There was a more affirmative agenda. As often, its roots go back to the late 1940s. But the young President Kennedy became an articulate spokesman of the need for vigorous US leadership of an economically vital Western world. He sounded the theme in his inaugural address in January 1961. His first year in office was plagued by the Bay of Pigs fiasco in Cuba and by the crises over Berlin and the Congo.
A major element of the world economic system was the General Agreement on Tariffs and Trade, adopted by twenty-three countries in 1947, which promulgated rules to guide states in their trading relationships and provided a forum for reducing tariffs and other restrictions on imports from their high levels of the late 1940s. By 1961, this liberalizing process seemed to have run out of steam. Moreover, six European countries had in 1958 created the EEC, which when completed (in 1970) would become a trading entity larger than the United States, with a single negotiating authority. The United States desired the reluctant United Kingdom to join the EEC. With all this in mind, in January 1962, Kennedy proposed a bold new round of trade negotiations. In contrast to earlier multilateral negotiations, he wanted to cut tariffs (with selected exceptions) across the board by to 50-100 percent on products for which the United States and the EEC together accounted for more than 80 percent of world exports. This was a respectable list if the UK joined the EEC, but not otherwise. It provided for elimination of duties on tropical products. And, domestically, it called for the first time for adjustment assistance for firms and workers who were hurt by the trade liberalization.
Kennedy cited five important changes in the world as reasons for proposing legislation, one of which was the "communist aid and trade offensive." The Soviet bloc had trebled its trade with forty-one non-Communist developing countries, and Soviet trade missions had been active around the world. Kennedy’s trade proposal was to be his top legislative priority in 1962. It created the basis for the subsequent Kennedy Round of trade negotiations. The president identified the basis for the subsequent Kennedy Round oftrade negotiations. The president identified seven benefits expected to flow fTom the legislation and subsequent trade liberalization. The first three concerned benefits to the US economy, including enhancing its capacity to bear burdens of defense, as well as that of its allies. The remaining four reasons - promoting the strength and unity of the West, proving the superiority of free choice, aiding developing nations, and maintaining US leadership of the free world - were suffused with references to competition with the "Sino-Soviet world" and the importance of a liberal trading regime for winning that competition.
The results of the Kennedy Round, concluded in 1967, were less than hoped for, but nonetheless impressive. Britain did not join the EEC until 1973, delayed by a veto by President Charles de Gaulle of France. As a result, the provision for elimination of tariffs on manufacturing goods went unused. But tariffs were reduced by an average of about 35 percent on $40 billion of world trade in the base year, 1964. Above all, it was a successful cooperative venture, overcoming parochial domestic interests, and bringing the "free world" closer together economically.
President Johnson faced the domestic challenge of ensuring civil rights to American blacks and the domestic objective of introducing publicly financed medical care for the aged and the poor - furtherance of Franklin D. Roosevelt’s New Deal, as he saw it. Apart from relations with the Soviet Union and the escalating conflict in Vietnam, Johnson faced the challenge - as did other Europeans - of dealing with de Gaulle’s aspirations and ambitions for establishing France’s independence of the United States and its primacy in Europe. De Gaulle aggressively questioned the international role of the dollar in early 1965 and withdrew French forces from NATO’s integrated command (but did not withdraw fTom NATO) in March 1966. De Gaulle had earlier vetoed Britain’s application for EEC membership and had stymied the EEC by prohibiting his ministers from attending the decisionmaking Council of Ministers. De Gaulle desired France to have a relationship with the Soviet
Union independent of, and different from, that of the United States and other European countries. The Soviets responded politely but warily. Their main concern was with Germany, and they flirted with various ideas for weaning Germany away from the Western alliance. Johnson worked hard (and successfully) to keep Germany firmly with the West, even while making overtures to the Soviet Union on non-proliferation (which would effectively deny Germany nuclear weapons) and on strategic arms control.
Johnson unsuccessfully sought new tariff-negotiating authority in May 1968. President Richard Nixon, breaking with the protectionist tradition in the Republican Party and reflecting his view of America’s proper role in the world, renewed the request in November 1969. New authority was finally granted by Congress in December 1974 (after Nixon had resigned), which provided the basis for US participation in the next major trade-liberalizing round of multilateral negotiations, the Tokyo Round, begun in 1973 and concluded in 1979.
The other main strand of post-1960 foreign economic policy with respect to Europe was mainly defensive. In 1944, forty-four nations had agreed at Bretton Woods, New Hampshire, to postwar rules governing financial transactions among countries, and to the creation of two new implementing institutions, the IMF and the International Bank for Reconstruction and Development (later known as the World Bank). The rules inter alia required restriction-free access to currency for current account transactions (for example, trade and travel), nearly fixed exchange rates among currencies, and currency convertibility into gold for monetary authorities (but not for ordinary citizens), a commitment adopted only by the United States. As the Bretton Woods system came under increasing strain after the late 1950s, one strand ofUS policy was to avoid a collapse ofthis system. Various currencies, including the US dollar, came under pressure from time to time, and adjustments had to be made to deal with imbalances in international payments. The main thrust of US policy during the 1960s was to pursue actions that forestalled a serious financial crisis while still preserving high-priority US objectives, which included maintaining the Atlantic alliance, keeping British and US troops in Germany, extending an open trading system, and pursuing the non-proliferation treaty and other initiatives. The cooperation of other countries was required, and the United States did not want to jeopardize that cooperation. Thus, a series of temporizing measures were taken to head off periodic US payments crises. As President Johnson once said to a startled William McChesney Martin, chairman of the Federal Reserve Board, "I will not deflate the American economy, screw up foreign policy by gutting aid or pulling troops out, or go protectionist just so we can continue to pay out gold to the French at $35 an ounce."51
One mechanism for supporting countries in financial trouble, especially if the trouble was due to currency speculation on a change in the official exchange rate, was to provide short-term credit to the country’s monetary authorities enabling them to ride out the speculation until it reversed. Thus, a mechanism was put in place to provide such credits, partly by the US Treasury’s Exchange Stabilization Fund, partly through “swap" lines extended by the Federal Reserve System to other central banks. Through these mechanisms the United States provided short-term credits to Canada (1962,1968), Italy (1963-64,1975), Britain (many times), and France (1968,1969). If the short-term credits could not be repaid quickly from reversals of speculative capital flows, they could be repaid by drawing on the IMF, another cooperative arrangement, for longer-term credit.
Britain’s budget and balance of payments were so heavily burdened that Prime Minister Harold Wilson considered not only pulling British troops east of Suez into Britain, which was ultimately done, but also cutting significantly the British Army on the Rhine. If he had done so, he would have increased pressure in the United States to reduce its own forces in Germany and elsewhere in NATO, actions that were already being advocated in the US Senate, especially by Senator Mike Mansfield (D-Montana), during a period of intense fighting in South Vietnam. In addition to short-term financial support to Britain, the United States, itself facing financial pressure, launched in 1967 a tripartite burden-sharing discussion with Britain and Germany. The three governments worked out financial arrangements that increased German purchases in Britain and, secondarily, in the United States. These accords deflected pressure in both countries to reduce troop levels in Germany.
The leading Western countries, joined by all members of the IMF, also agreed on a major reform of the international monetary system. They created a new, international money (for monetary authorities), the Special Drawing Right (SDR). The financial journalists dubbed it “paper gold" because it was to replace gradually the international monetary role ofgold and ease the demand for dollars by central banks. The SDR was seen at the time as a major step forward toward international monetary cooperation, although it subsequently failed to live up to expectations.
Britain’s balance-of-payments problems were eased following a 14 percent devaluation of the pound in November 1967. US balance-of-payments problems came to a head in August 1971, when President Nixon ceased convertibility ofthe US dollar into gold (for foreign monetary authorities). At the same time, he imposed a wage/price freeze in the United States to stop the momentum of inflationary pressures that had built up in the preceding four years, and levied a 10 percent surcharge on all dutiable imports into the United States - the last mainly to force other countries to negotiate seriously on a realignment of exchange rates. These tense negotiations were concluded in December 1971 with the Smithsonian agreement. It realigned exchange rates of the leading currencies against the dollar and provided for an increase in the official dollar price of gold. However, pressures continued in foreign exchange markets, and in March 1973 major currencies were allowed to float against the US dollar (Canada and Britain had earlier switched to floating exchange rates). Continental Europeans struggled to maintain a higher degree of exchange rate stability among their currencies, leading to the European monetary system in 1979 and eventually to a common European currency in 1999.
Thus, in the early 1970s, two key features of the Bretton Woods system were abandoned: gold convertibility of the dollar and fixed exchange rates among major currencies (many other countries around the world maintained fixed exchange rates with respect to the dollar, the French franc, the British pound, or some other currency). This traumatic period of financial turmoil prompted serious discussions of reform of the international monetary system, which in some respects has not matured even in the early twenty-first century, but those issues lie outside a discussion of the Cold War, except insofar as they affected Western cohesion and prosperity. Despite occasional monetary turmoil, the Western economies generally performed well, as noted above.
World History
