The Atlantic and Its Enemies (29 page)

The Germans had been exporting successfully to the USA - their surplus on trade in 1958 amounted to $6bn - and had collected dollars. But dollars also went from the USA to Germany (and other European countries) because of the profits that investors could make there - greater than in the USA. There was a further problem. Some very large American firms established themselves overseas, partly to take advantage of cheaper labour costs, and partly to get over protectionist barriers. In France, especially, a desire to build up native industries meant that foreign goods were kept out. It was obvious, in that case, for the first of the great American electronic-computer firms, IBM or Xerox, to set up factories in France and elsewhere. These firms also represented a dollar outflow to Europe. The result was that in Europe there were large sums of money in dollars, the ‘eurodollar’.

In theory these dollars could be exchanged for gold, at $32 per ounce, and efforts were made to control the gold market somehow. If these dollars were at any stage sent back to the USA, with a demand for them to be exchanged into gold at the fixed rate, it might go beyond what the USA could stand. This eventually happened in summer 1971, and it was the end of the extraordinary quarter-century of prosperity that had followed the Marshall Plan of 1947. To stop this meant the Americans’ keeping their own government spending in reasonable bounds, and it also meant international co-operation: the European banks would have to buy up the spare dollars. A Belgian economist, Robert Triffin, who had migrated to Yale, had foreseen this problem - the Americans, required to send dollars abroad, would lose control of their own currency, and it could then slide in value. By 1960 eurodollars were already greater in value than the gold held in reserve at Fort Knox. With the British pound, which still accounted for half of the world’s trade, the problem was much greater, given the weakness of the British economy and the extent of British overseas commitments, with garrisons ‘east of Suez’ to keep some kind of control over the petrol reserves, or, for instance, to deter the Indonesians from invading Malaysian territory. As Europe recovered in the 1950s, these problems were under control, but by 1958 there was a deficit in the American balance of payments - $5bn - and $2bn went abroad in foreign investment.

American business was still enormously successful and the great firms - Ford, which was all over the place, but many others - were all doing well, setting up overseas. The eurodollar problem was still easily under control, and the problem would have gone away altogether if a dollar devaluation had been allowed, or some revaluation of the Mark, which was anyway very low. The German exporters themselves did not want such a revaluation, because they thought that, if their prices rose, they would lose customers; and in any case holders of eurodollars did not want their value to be reduced. Instead of a serious readjustment, various hand-to-mouth expedients were used. The International Monetary Fund’s resources were too low to be very useful - they were still, in 1958, at the same level as ten years before, despite the huge increase in trade. Instead, a group of trading industrial countries was set up, the G10, in 1960. This happened just when, for the first time, people sold their dollars for German Marks. Gold on the free market also rose above $32 per ounce. This did not worry Kennedy. In his first year, a decision was taken to increase spending, and to take on a deficit. It was the first point at which post-war financial management broke with old prudent ways. Not many people objected, at the time. As a leading expert, Barry Eichengreen, comments, it was all rather clumsily done, yesterday’s problems being solved by the creation of tomorrow’s. He adds, ‘the array of devices to which the Kennedy and Johnson administrations resorted became positively embarrassing. They acknowledged the severity of the dollar problem while displaying a willingness to address only the symptoms.’ Americans were not allowed to own gold coins; visas became easier to encourage tourism, the virtues of Disneyland advertised. Besides, the low official price of gold, and the difficulties set up about using it, discouraged output and so made the potential problem worse. In the USA inflation in the sixties ran to 30 per cent, the very problem that Keynes’s critics had identified.

What was at stake, in these very technical transactions, was the base of the enormous prosperity that the fifties had seen. Oil cost $1 per barrel - almost absurdly cheap, and fuelling a great automobile boom in the West, especially Germany and the USA (where cars became boat-like). Other raw materials were also very very cheap, partly because the market had been glutted, partly because, during the war, men had understood how to make more of them go round. Once the dollar fell in value, those raw materials would rise in price. Wise old heads did shake, but this was not a period when wise old heads counted for much. Keynes had sneered at them as the ‘orthodoxy’. In the 1960s the world financial system, which in a sense he had inspired, did work. The central bankers regularly met, at the Bank for International Settlements in Basle, and they knew the rules. The dollar and pound were the essential trading currencies for the world, and if their value became unclear, trade might suffer. Therefore, the central bank of a country with a strong currency, the Mark being the obvious one, would not sell a currency that others (‘speculators’) might already be selling: instead, the central banks would buy it and so keep up its value. They did not exchange dollars for gold, and in 1961 there were ‘swap arrangements’ for immediate support of the pound ($1bn, with another $3bn in 1964). The Germans refused to revalue the Mark, thinking that their trade might suffer, but they did forbid the payment of interest on foreign accounts and they (like the Swiss) co-operated to keep the dollar price of gold at or near the low official rate (the ‘Gold Pool’). Of course, the basis of it all was that the Americans were chief defenders of the West in NATO with the British as loyal seconds, and when the whole system became weak later on a German chancellor even spelled it out - in supporting the dollar the Germans were defending themselves. NATO developed its own military-financial complex, and the central banks were part of it. The ‘American Peace’ ruled and the world gave Kennedy a good welcome. The ‘New Frontier’ books became bestsellers, endlessly discussed, and the
New York Review of Books
made the timing. But do these books now survive, except as remembered titles?

There was trouble ahead. The new team in Washington was self-consciously Rooseveltian, as they understood it, and that meant action against poverty at home, and an assertion of American power abroad. Curing poverty and removing the dreadful blot on the USA that the Black problem amounted to caused much enthusiasm, and at home there was an impetus for change. Spending on education rose, partly to counter the supposed advantage that the Soviet Union had acquired in natural science, as displayed with
Sputnik
. Kennedy preached 5 per cent growth in 1960: it was the federal government’s responsibility to abolish poverty, and Kennedy duly put up government spending, though not by very much. Less noticed at the time, he also lowered taxes, which had been at very high, wartime levels, and something of a boom followed. However, the New Frontier ran into difficult country. Kennedy also had to deal with foreign problems and one of these now developed. It was in fact a combination of problems - the whole nuclear structure on the one side, and the question of the West’s relations with what was turning into something of a nightmare, the ‘Third World’. Kennedy’s team were impressed by the sheer success of the Marshall Plan, as they understood it, and a Marshall Plan, applied worldwide, could, in their view, sort out the whole problem of underdevelopment (as it was then known).

11

Berlin-Cuba-Vietnam

The fifties ended with two symbolic places: Berlin and Cuba. Over these, West and East duly collided. As Khrushchev looked at the world in 1957 - the fortieth anniversary of the Revolution - he could be quite optimistic. True, the Soviet people lived much less well than the Americans, and West Berlin was a permanent demonstration of this, but as Khrushchev angrily explained to the visiting American Vice-President, Nixon, man did not live by up-to-date kitchen equipment alone. The anniversary of the Revolution was triumphalist, with huge thermonuclear tests in the offing, and Khrushchev beamed: ‘It is the United States which is now intent on catching up.’ A 21st Congress in January 1959 announced that the USSR itself would ‘catch up’ by 1970. On the other side, Cuba was in its way a showcase of things that went wrong in the American hemisphere, and to this day the hero of Latin American revolution, Che Guevara, agonizes over T-shirts. In the view of Khrushchev, and not his alone, Russian Communism was the right formula to turn Cubas into modern places, without the unemployment and racism that came with capitalism. At the turn of the fifties and sixties, Cuba and Berlin meshed to cause crisis.

Khrushchev now lived in a very dangerous mixture of inferiority complex and megalomania, and that was only confirmed by events at home. He had taken time to secure his power and had needed the alliance of men of the old order, including Marshal Kliment Voroshilov and Molotov. But they and other seniors were alarmed at Khrushchev’s extraordinarily impulsive ways and they had never been happy with the denunciation of Stalin: whatever next? Wild reform schemes came up early in 1957, because, like Stalin before him, Khrushchev resented having to deal with the Party, and, like Malenkov and many others, would have liked to build up a state machinery with its own rules, as in normal countries. However, that would have meant (and, in the event, did mean) substituting a fabulously multiplied bureaucracy. He put up tower blocks in the cities, doubled Party membership to 12 million, shut an eye to rural migration, and thus created his own clientele. As matters turned out, he fashioned a huge and self-replicating bureaucracy, the leaders of which had their own clientele in the various national republics. In 1958 he was quite popular, and though the intelligentsia regarded him as a clown, he knew well enough how to square them: release of a critical novel, toleration of a critical poet, visas abroad, would get them going. Meanwhile, the Moscow ruler received visits that Moscow rulers had had in the past - envoys from China, from India, from Iran, from the West, all wondering what they might do to please.

He had boasted somewhat earlier of intercontinental ballistic missiles (ICBMs), though in that - rather fatefully - there was less substance to the boast (only in the 1960s were they operational and even then there were only four of them). Khrushchev, who had sneered back at critics that he had no education beyond some lessons that the local priest had given in return for a present of a sack of potatoes, had done far better than any of them. Foreigners might look down their noses at his armpit scratching and his gobbling, spluttering table manners, but he was the leader of what would soon be the most powerful country on earth. At any rate, Khrushchev’s ascendancy was now beyond challenge, and he looked to foreign affairs. Here was pabulum for megalomania, as the world trumpeted the ‘Soviet achievement’ and wondered how to emulate it. Had the time come to get the perennial German problem out of the way? Stalin had tried force. Khrushchev applied the Leninist tactic, first used in 1922, of pretending to be just another ruler of just another state. ‘Dictatorship of the proletariat’ could be passed off as just a piece of picturesque titling, on the lines of ‘King of Kings’.

Late in 1957 the Americans had placed limited-range nuclear weapons in Europe but there were evident disagreements in the West. True, it had a Cold War to fight, but each country fought its own version. The British were by now rapidly losing the substance of their power and could be expected to play up the shadow of it at international gatherings: classically ripe for flattery, and in any case not really willing to fight for, of all things, West Berlin. The Germans might be isolated, and might even come to terms, which, for Moscow, was the great prize. Adenauer had been shaken by the Americans’ abandonment of their allies over Suez, and there were fears in Germany that the Americans would not even reply with a nuclear strike to a land invasion of Central Europe: why should they risk an attack on their own cities? Adenauer approached Moscow with a vague suggestion that there might conceivably be an Austrian solution for East Germany. Khrushchev aired the possibility of a nuclear-free Europe and there was a Geneva conference as to the ending of nuclear tests, in October 1958. Meanwhile other tensions developed. The Middle East had been boiling since Suez, and Nasser was showing off. He proposed an Egyptian-Syrian union, then inspired a coup in the Lebanon, and then another, particularly gruesome, one in Baghdad. Finally there was another and rather strange trouble, the emergence of a sinisterly independent-minded Red China.

Khrushchev was not the only Communist leader to be showing off: Mao Tsetung had his own remarks to pass. This time round, he had encouraged the intellectuals to criticize and promised to tolerate this (an episode known as ‘a hundred flowers bloom’). Nationalism was thus encouraged and the Chinese attacked India, a friendly country, over a trivial frontier dispute in the high mountains. Khrushchev had not supported this. Late in August 1958 there was a further crisis in the Far East, when Red Chinese artillery pounded the islands of Quemoy and Matsu - quite insignificant in themselves, but close to the Chinese shore and still occupied by the Kuomintang forces of Chiang Kai-shek in Taiwan. Eisenhower responded, had his navy escort supply ships and even threatened to use nuclear arms (though he also made Chiang Kai-shek promise not to attack Red China). The crisis then ebbed away. However, this crisis created much more trouble than it appeared to. There were under-the-surface disagreements between Khrushchev and the Chinese because he told them not to invade Taiwan: there were to be no more Koreas. In 1959 he refused them a prototype bomb. Thereupon the Chinese started denouncing what they called ‘revisionism’. They were angry at the vilification of Stalin, whose statue still stood in the middle of Peking, and they especially resented, or claimed to resent, Khrushchev’s doctrine that nuclear war would be too destructive to be contemplated (‘peaceful coexistence’). Mao remarked that if 500 million or so people in the Communist bloc would be wiped out, the price might be worth paying for the utter end of capitalism and imperialism. The arguments between the two sides, couched in the usual wooden language, became public, as each side tried to convince other Communist parties of the correctness of its view. The depth of the disagreements became clear abroad only in 1963, and even then they were sometimes dismissed as part of some game to fool the West, ‘disinformation’, but they were real enough, and even caused one of the Soviet-dominated parties to defect, that of little Albania, fizzing with resentment at the preferential treatment accorded by one and all to Tito in Yugoslavia, which contained its own Albanians. Khrushchev now tried to stop China’s development, and in July 1960 withdrew his specialists. He had been clumsy - giving the Chinese too much in 1955 and then taking too much back five years later. The quarrel was to do with the role of war and revolution in an ideological world filled with such hatreds. At any rate, here was competition for Moscow, and Khrushchev responded adventurously. Off he charged, over Berlin.