Introduction
“The jargon and the special mystique that surrounds international monetary matters diverts attention and obscures understanding of the basic issue of how manipulation of interest rates and money reserves affects the wellbeing of the free peoples of the world,” remarked AFL-CIO Research Director Nat Goldfinger in 1967. “It obscures also the fact that most of the decisions are taken by a small group of men representing the central banks of the world and their private banking colleagues.”Footnote 1
Goldfinger’s charges raise important questions about the distribution of power in decision-making at a critical moment in global economic history. Histories of the collapse of international monetary relations in the late 1960s and early 1970s often center on a small cast of central bankers, economists, and national leaders engaged in economic diplomacy.Footnote 2 Historians, however, have not adequately linked the developments in international monetary affairs with domestic political and economic change. Although scholars generally agree that a changing global economy posed new challenges to labor unions in the 1970s, we lack a full of account of the varied ways that economic change contributed to the decline of organized labor’s social and political influence.Footnote 3
This article demonstrates the importance of combining domestic and international perspectives for understanding the political, social, and economic changes that came with the end of the Bretton Woods system. By transcending the traditional boundaries dividing histories of business, labor, domestic politics, and international political economy, it aims to capture a more holistic view of the domestic political ramifications of the end of the Bretton Woods system.
To date, historians of business-government relations have led the way toward a more comprehensive understanding of the domestic politics of international monetary affairs. Historians of business-government relations have shown how U.S. dollar deficits in the late 1960s and early 1970s shaped business political mobilization for a more market-oriented political economic order. Over time, business leaders became increasingly disillusioned with government programs to support the Bretton Woods system.Footnote 4 By the end of the 1960s, multinational firms and business-interest associations mobilized politically to oppose capital controls that restrained dollar outflows.Footnote 5 Moreover, business associations pinned blame for inflation on wage pressures and government spending, and they therefore called for wage restraint and federal budget cuts to redress the United States’ dollar problems.Footnote 6
Organized labor’s response to U.S. payments deficits, however, remains largely unexamined. Historical analyses of labor unions’ antagonism toward wage-price guidelines (under the Kennedy and Johnson administrations) and controls (under the Nixon administration) provide the primary exception to this trend, but one that demonstrates the necessity of tracing more specifically the relationships between domestic and international political economy.Footnote 7 Beyond the question of wage restraint, historical discussion of organized labor and international economic policy has largely centered on union concerns about rising imports and capital flight.Footnote 8 The scholarly focus on these issues is perhaps unsurprising, as these issues raised the greatest ire within organized labor. Because import competition and wage restraint directly impacted union members, these issues prompted the greatest discussion among local and national leaders within AFL-CIO Executive Council meetings and during the federation’s biannual national conventions.Footnote 9
A full understanding of union political activism in these years, however, requires a broader frame. Economists staffed in the AFL-CIO Research Department applied their technical expertise to analyze the indirect ways that the balance of payments related to issues of direct concern to union members, like jobs and domestic spending programs. AFL-CIO statements on issues ranging from the actions of the Federal Reserve Board to the ultimate desirability of the gold-dollar peg were the subject of little debate within the federation’s Executive Council. Instead, the Research Department, led by Nat Goldfinger, provided guidance to national and local leaders and prepared policy statements for the council. Union leaders carried the ultimate authority to approve or reject proposed policy statements, but in international monetary matters, they largely deferred to staff economists’ recommendations.Footnote 10
By examining AFL-CIO economists’ analyses of the causes and consequences of the dollar crisis, this article reveals a broader intellectual critique of multinational enterprise by organized labor than historians have previously acknowledged.Footnote 11 The labor federation did not limit its criticism to charges that capital flight and imports from foreign subsidiaries cost Americans well-paying industrial jobs. It also included allegations that multinational corporations played a role in undermining the U.S. dollar and, with it, in sacrificing the expansionary monetary and fiscal programs that lie at the heart of postwar growth liberalism.Footnote 12
Because AFL-CIO economists identified private investment outflows as a major cause of the United States’ payments deficits, their proposed remedy for redressing the dollar problem differed from that put forth by business associations. The AFL-CIO proposed restrictions on imports and capital outflows rather than government spending reductions, interest rate increases, or wage restraint to redress U.S. payments deficits. These efforts ultimately failed. The politics of domestic growth liberalism would no longer reign, presaging labor’s declining influence in the last quarter of the twentieth century.
This article thus deepens historical understanding of the disintegration of the labor-management political cooperation in twentieth-century U.S. history. A number of scholars have attributed the end of the postwar “accord” to domestic factors, and others point to rising import competition as a threat to union interests.Footnote 13 International monetary affairs, however, were by no means irrelevant to business-labor relations in these years. The dollar deficit could only be resolved by limiting outflows of dollars and tamping inflation, but domestic political processes determined how the costs of such restrictions would be distributed within society. These circumstances drove political conflict between business and labor organizations, and the former ultimately emerged victorious.
The article is divided into three parts. Each section centers on a key turning point in the transformation away from the dollar-centered Bretton Woods monetary system through a close examination of congressional hearings, AFL-CIO publications, and archival materials held in the Lyndon B. Johnson Presidential Library. These three sections explore how the politics of international monetary relations threatened to undermine three pillars of the AFL-CIO’s postwar growth agenda—low interest rates, expansionary fiscal policy, and a commitment to industrial breadwinning. Together, they show how the AFL-CIO leadership, guided by its staff economists, linked the expansion of multinational production to the crises of the Bretton Woods system and to the impending demise of postwar growth liberalism.
Part 1 begins by exploring how AFL-CIO leaders and economists responded to French President Charles de Gaulle’s 1965 speech announcing France’s increased dollar conversions. Scorched by the Federal Reserve Board’s restrictive monetary policy during the late 1950s, union representatives warned that raising interest rates would threaten domestic growth. Instead, they urged restrictions on private dollar outflows as a more effective means to redress the dollar problem.Footnote 14 Although the AFL-CIO effectively advocated for voluntary restrictions on outward foreign direct investment (FDI), this victory proved Pyrrhic. As scholars have demonstrated, the resulting guidelines encouraged firms to borrow more heavily in unregulated Euromarkets, further destabilizing the Bretton Woods system.Footnote 15 Moreover, the Federal Reserve Board ultimately voted to raise the discount rate, against the wishes of both the AFL-CIO and the Johnson administration, in December.
Part 2 jumps to 1967 and 1968 to explore the politics of the federal budget. As government spending on military efforts in Vietnam mounted, inflation and a series of dollar crises spurred growing international pressure for budget restraint to stabilize the Bretton Woods system. At the same time, U.S.-based multinational firms grew restless under increasingly restrictive government policies on outward FDI. Despite these pressures, the AFL-CIO leadership held fast to its faith in expansionary fiscal and monetary policies and its commitment to U.S. involvement in Vietnam. Frustrated with the Johnson administration’s lack of action on U.S. payments imbalances, European central bankers ceased participation in multilateral efforts to shore up the dollar. Johnson, meanwhile, contradicted the AFL-CIO’s wishes and acceded to pressure for budget cuts after announcing that he would not seek reelection in 1968.
Part 3 turns to how labor leaders linked the problems of imports and investments in offshore production to the balance of payments issue. Labor leaders regarded import competition and multinational production as threats to the industrial order that underpinned unionized male breadwinning. They therefore pressed for capital controls and import quotas on a wide variety of goods, an agenda that culminated in their failed campaign for the 1971 Foreign Trade and Investment Act, known as the Burke-Hartke bill. AFL-CIO representatives portrayed the bill as a remedy to two major concerns surrounding the U.S. dollar—the exacerbation of U.S. payments deficits caused by rising imports and the recurrence of speculative currency crises. On the whole, the AFL-CIO’s activism for the Burke-Hartke bill, like its activism on monetary and fiscal policies, revealed a desire to maintain the growth-oriented industrial economy upon which post–World War II liberalism rested—a model struggling to survive in a globalizing world order.
Monetary Policy and Johnson’s Voluntary Restraint Program, 1965
The postwar growth economy rested in part on a combination of relatively low interest rates and low inflation, a product of the particular international circumstances of the postwar era. Under the Bretton Woods system, U.S. payments deficits provided international liquidity that financed recovery and growth abroad.Footnote 16 Nevertheless, foreign countries’ willingness to hold U.S. dollars waned as U.S. payments deficits mounted and concerns about inflation abroad arose. When French President Charles de Gaulle threatened to undermine this system by converting French dollar holdings to gold, U.S. policymakers came under pressure to raise interest rates and thereby restrain the dollar flood. The AFL-CIO, by contrast, sought an alternative solution—restricting private capital outflows.
Understanding the political debates about interest rates and capital outflows in the mid-1960s thus requires a more fundamental understanding of the weaknesses of the international monetary system under the Bretton Woods order. As early as 1947, Yale economist Robert Triffin identified the basic vulnerability of the Bretton Woods system—the international monetary order rested upon the guarantee that the United States would convert dollars to gold at a fixed rate of thirty-five dollars per ounce. The system would thus become vulnerable if the United States’ ability to convert dollars to gold became uncertain. Once the number of dollars in the international system exceeded the Treasury’s ability to convert dollars to gold at the fixed rate, any sign of U.S. hesitancy to pay out gold for dollars could spark panicked sell-offs of dollars in international markets.Footnote 17
As previous scholars have shown, cooperation among central bankers forestalled the international monetary system’s collapse despite its increasing fragility over the course of the 1960s.Footnote 18 As early as October 1960, the dollar’s value came into question as the price of gold in private markets rose to forty dollars per ounce, even as the official convertibility rate remained thirty-five dollars per ounce.Footnote 19 Central bankers therefore devised a variety of arrangements to support the viability of the Bretton Woods system. In most cases, central bankers intervened in financial markets to buy up excess dollars that they then held in reserve to maintain the fixed dollar-gold rate. Most prominently, Great Britain, Switzerland, the United States, and the countries of the European Economic Community formed the Gold Pool, a cooperative effort to buy and sell gold in London financial markets to maintain the dollar’s value.Footnote 20
During the mid-1960s, French President Charles de Gaulle’s distaste for the dollar-centered monetary order, combined with his country’s large dollar surpluses, posed the greatest threat to the Bretton Woods system.Footnote 21 On February 4, 1965, de Gaulle called for reform of the monetary system to eliminate what he considered the United States’ exorbitant privilege. He publicly accused the United States of “export(ing) their inflation” to Europe by running dollar deficits, an accurate assessment that nevertheless ignored the role of these dollar deficits in fueling France’s own trente glorieuses. The expansion of U.S.-based multinational firms into Europe also alarmed de Gaulle, who charged that the inflation of the dollar had supported U.S. corporate takeovers of French firms. He thus encouraged other countries to join France in turning their dollars into the U.S. Treasury for gold.Footnote 22
As the Johnson administration considered an appropriate response to reassure markets, AFL-CIO leaders warned against contractionary policies and pinned ultimate blame for U.S. payments deficits on multinational firms. AFL-CIO President George Meany warned Johnson against interest rate increases to attract capital inflows, as such a “dangerous measure” might “reverse the recent improvement of the unemployment situation.” Instead, Meany urged the administration to “treat the source of real payments problems—the large-scale and sometimes unpredictably sudden outflows of private investment.”Footnote 23 Johnson agreed, noting in a letter to the AFL-CIO president that “the core of the current problem is the large outflow of private capital.”Footnote 24
That same week, Nat Goldfinger echoed Meany in his own statement before the Senate Committee on Banking and Currency. He warned against “tight money and higher interest rates” that “could slow down the economic advance and reverse the improvements of the unemployment position.” Instead, the United States needed “expansionary monetary and fiscal policies to achieve and sustain full employment.” Goldfinger identified “the large-scale and sometimes unpredictably sudden outflows of private investment” as “the points where the problems” with the U.S. balance of payments “arise.” He thus recommended “national supervision and temporary restriction” of private investment outflows as the solution to U.S. payments deficits.Footnote 25
Within a week of de Gaulle’s address, Johnson answered the French president with a comprehensive balance of payments program that generally aligned with organized labor’s priorities. He pronounced those concerned about the dollar’s value “needlessly afraid.” At the same time, he affirmed the administration’s “firm determination” to reduce the U.S. payments deficit. He proposed export and domestic tourism promotion as well as administrative efforts to reduce defense-related dollar outflows. Johnson also called for a series of measures to rein in dollar outflows by U.S. financial firms, including extension and broadening of the Interest Equalization Tax and voluntary cooperation to limit foreign lending. Finally, the president announced the initiation of a voluntary program that encouraged U.S.-based firms to reduce their FDI outflows.Footnote 26
The AFL-CIO’s victory, however, proved fleeting. In early December, the Federal Reserve Board voted to raise the discount rate to head off what bankers viewed as inflationary pressures.Footnote 27 The decision ran counter to the Johnson administration’s expansionary agenda and infuriated congressional Democrats.Footnote 28 The AFL-CIO Convention quickly joined the chorus of critics. Its statement condemned the rate increase because it would raise the cost of borrowing and thus dampen the business investment that fueled economic growth and employment. “Interest rates in the United States should be determined by the needs of the American economy for sustained full employment and increasing buying power,” the convention asserted, “not by the monetary decisions of foreign central banks.”Footnote 29
Moreover, the voluntary restraint program did little to redress the labor federation’s concerns about capital outflows. Firms largely adhered to the investment guidelines, but they did so largely by borrowing funds in so-called Euromarkets to fund their foreign subsidiaries.Footnote 30 Euromarkets were unregulated, private financial markets that operated beyond the purview of central banks.Footnote 31 In essence, then, the Euromarkets became an offshore site where U.S.-based multinational firms could borrow and deposit dollar funds without contravening the federal guidelines.
Nevertheless, the Johnson administration welcomed foreign borrowing to finance overseas investments as a strategy to foster multinational firms’ growth without draining the U.S. Treasury.Footnote 32 For the administration, the voluntary restraint program was merely a means to meet its balance of payments goals, and foreign borrowing enabled the United States to achieve that aim even as firms’ international investments continued to expand. According to Secretary of Treasury Douglas Dillon, businessmen concerned that the program aimed to reduce FDI struggled with “a misunderstanding of the intent and approach” of the program.Footnote 33 Secretary of Commerce C. R. Smith went so far as to describe “the amount of foreign funds raised abroad … to replace direct investment from the United States” as “a more accurate measure” of the program’s success than the reduction of FDI outflows.Footnote 34 In short, although the continued expansion of multinational enterprise rankled union officials, the program’s primary objective remained limiting official dollar outflows.
Budget Battles, 1967–1968
The AFL-CIO leadership also sought, unsuccessfully, to dissuade policymakers from using contractionary fiscal policies to rein in U.S. payments deficits. The federation had long advocated for government spending and lower taxes as a formula for job creation and economic growth.Footnote 35 In the late 1960s, federal spending seemed as urgent as ever. As war raged in Vietnam, domestic poverty remained at home. To the AFL-CIO leadership, government spending on both foreign and domestic programs—a “guns-and-butter” policy—was needed. Nevertheless, organized labor’s demands met head-on with foreign governments’ concerns about dollar inflation and with business political mobilization against capital controls. The expansionary policies that lay at the heart of postwar growth liberalism thus died in the political battles over U.S. payments deficits.
As the United States became more deeply enmeshed in the Vietnam War, real military spending rose beginning in 1965 and peaked in 1968. As previously noted, the Federal Reserve responded to inflationary pressures by raising the discount rate in December 1965, but the administration refused to consider a tax increase to counteract federal spending increases through 1966. When Johnson did propose a tax increase in 1967, Arkansas Democrat Wilbur Mills, chairman of the House Committee on Ways and Means, refused to forward the tax bill to the House floor until the administration agreed to couple the measure with spending cuts. With defense spending mounting, the U.S. payments deficit rose sharply in the last quarter of 1967.
At the same time, a wave of urban unrest in the summer of 1967 prompted the AFL-CIO and its liberal allies to demand an urgent expansion of federal spending on domestic programs. Accumulating grievances in poor Black communities had spurred uprisings in previous summers in cities, including Harlem and Watts. Nevertheless, the scale and scope of unrest in 1967 spurred a reevaluation of the successes and limitations of Johnson’s Great Society. Twenty-three Black men, women, and children died in Newark protests following an instance of police brutality in July. That same month, forty-three people, including thirty-three people of color, died in Detroit in violence sparked by a police raid in a Black community. As the Johnson administration dispatched nearly five thousand federal troops to Detroit, the president set about appointing a National Advisory Commission on Civil Disorders to study the causes of discontent in U.S. cities.Footnote 36
The AFL-CIO responded by joining with city governments and civil rights, business, and religious groups to form an “Urban Coalition” intent on directing federal resources to redress urban poverty.Footnote 37 The coalition organized an Emergency Convocation in August, attended by a thousand prominent leaders, that called for a federal employment program to create jobs for “at least 1 million of the presently unemployed … at the earliest possible moment.”Footnote 38
Nevertheless, a dollar sell-off at the end of 1967 sparked growing international pressure on the Johnson administration to reduce U.S. payments deficits and thus posed a threat to domestic spending programs. In November 1967, the British government’s decision to devalue the pound sparked panic that the dollar might soon succumb to a similar fate, and in December, the U.S. Treasury paid out more gold in exchange for paper currencies than it had in any previous month during the 1960s.Footnote 39 Foreign central banks, too, were fast selling off gold reserves in the London gold market to support the dollar’s value. In response, European central bankers made clear that they would cease their cooperation in the Gold Pool if the Johnson administration failed to take serious action to redress the US payments deficit.Footnote 40
AFL-CIO economists dismissed concerns about the U.S. dollar and decried the Federal Reserve’s decision to raise the discount rate in response to the panic. Nat Goldfinger warned that the discount rate increase would “not only slow up the American economy but could trigger a worldwide interest rate war.” Such decisions “taken by a small group of men representing the central banks” could undermine “the needs of the American economy for sustained full employment and increasing buying power.”Footnote 41
Goldfinger, moreover, dismissed claims “that the dollar’s position has been weakened and that the U.S. balance of payments deficit calls for correction” as “more of the fiction of the international monetary world.” He suggested that the dollar’s value rested upon the “strength and vigor and growth of the American economy.” Despite the fact that European and Japanese growth outpaced that of the United States in the decades after World War II, Goldfinger concluded that “it is the same dollar that financed the recovery of the free world after World War II.”Footnote 42
George Meany personally appealed to Johnson in December as the administration prepared its budget recommendations for the following year. He warned the president that his administration’s recommendations must not reflect “the false cry of ‘guns or butter’” that “has been raised from opposite ends of the political spectrum.” Rather, “the drive to make America a better place for all its citizens” through Great Society programs “can and must continue, even as Americans fight freedom’s battle in Viet Nam.” He thus called upon the Johnson administration not merely to maintain but to expand federal jobs, housing, and health-care programs. At the same time, Meany insisted, “Nothing is more important than the war in Viet Nam as such, or the broader burden of defending the cause of freedom everywhere.”Footnote 43
By this point, some leaders within the AFL-CIO had begun to organize against the AFL-CIO’s position on the Vietnam War, in part because they believed defense spending diverted funds from much-needed domestic social programs. On November 11, 1967, a group of roughly five hundred labor leaders and allies marked Veteran’s Day by gathering in Chicago for a Labor Assembly for Peace. Speakers included antiwar labor leaders such as Emil Mazey and Victor Reuther of the United Auto Workers, as well as allies such as Senator Eugene McCarthy and civil rights leader Dr. Martin Luther King Jr.Footnote 44
Nevertheless, on the whole, the peace stance encapsulated in the Labor Assembly for Peace remained a minority view within the AFL-CIO. In a November 1967 poll conducted by the AFL-CIO’s Committee for Political Education, 41 percent of respondents endorsed the president’s policies, and an additional 38 percent called for an escalation of military action.Footnote 45 At the AFL-CIO Convention the following month, American Federation of Teachers President Charles Cogen recommended a motion that the AFL-CIO refrain from taking a position on the war, but he found support from only two of nine hundred delegates present.Footnote 46 With the neutrality resolution easily defeated, the convention overwhelmingly passed a resolution asserting the federation’s “unequivocal” endorsement of Johnson’s policies.Footnote 47
Despite the AFL-CIO’s continued call for “guns-and-butter” spending policies, Lyndon Johnson announced a new balance of payments program on New Year’s Day in 1968. The administration tightened wage and price guidelines and discouraged strikes in key industries. It also called upon Congress to restrict tourism, expand export promotion programs, and revise the federal budget to increase taxes and cut expenditures.Footnote 48
On the issue of private foreign investments, the administration moved beyond voluntary restrictions to impose mandatory controls, a measure that received the AFL-CIO’s “complete support and endorsement.”Footnote 49 The new regulations limited FDI solely to reinvested earnings in continental Western Europe (excluding Greece and Finland) and South Africa and to 65 percent of FY1965–1966 FDI levels in Canada, Japan, Australia, the United Kingdom, and the oil-producing countries. The U.S. Department of Commerce’s Office of Foreign Direct Investments administered less stringent restrictions on investments in Greece, Finland, and “less developed countries”; there, a firm could invest up to 110 percent of its average FY1965–1966 direct investments.Footnote 50
Despite Johnson’s tightened program, dollar troubles persisted. By March 1968, the persistent weakness of sterling and political uncertainty surrounding the president’s program contributed to another sell-off of dollars. Scrambling as the Gold Pool converted hundreds of millions of dollars to gold, the Johnson administration asked the Bank of England to temporarily shut down the London gold market. In a subsequent emergency meeting, U.S. and Western European central bankers agreed to a number of reforms, including a division of the gold market into an official market, in which gold would remain convertible at thirty-five dollars an ounce, and a private market in which the price of gold would fluctuate with the market.Footnote 51
Nevertheless, European central bankers had reached their breaking point during the March Crisis, and any effort at central bank cooperation thereafter would prove difficult in the face of mounting frustration with U.S. policies. France had withdrawn from cooperating in the Gold Pool in June 1967, and the latest crisis spawned rumors that Italy and Belgium might soon follow suit.Footnote 52 The central bankers thus agreed to end the Gold Pool as part of the March reforms.
Firms with international operations, meanwhile, grew restless with federal policies. They objected that the new FDI restraint program placed the burdens of the dollar crisis upon their shoulders, even as the federal government remained reluctant to dramatically scale back its spending.Footnote 53 Many were “seeing red” over the imposition of mandatory controls.Footnote 54 The U.S. Chamber of Commerce’s monthly magazine, Nation’s Business, proclaimed that “Washington” had “lost control of the nation’s financial affairs,” and it questioned whether to attribute such “fiscal irresponsibility” to “incredible irresponsibility,” “colossal ineptness,” or “spectacular carelessness.”Footnote 55 Socony Mobil Chairman Albert J. Nickerson, who had endorsed the voluntary restraint program in 1965 as chairman of the Balance of Payments Advisory Committee of the Department of Commerce, now warned the administration that firms were “becoming increasingly restive.” They had grown concerned that the program was becoming “a substitute for action on other aspects of the balance of payments.”Footnote 56
Still, AFL-CIO Research Director Nat Goldfinger responded to the crisis by asserting the fundamental strength of the dollar based on national economic performance, dismissing investors’ concerns that U.S. deficits weakened the dollar’s value. He recognized the importance of “confidence” in the dollar but maintained that investors should be reassured that the dollar remained “the world’s strongest currency because the American economy is the richest and most productive in the world.” Its value rested upon “the $800 billion in goods and services produced by America’s workers in a single year,” not on the amount of gold held in the U.S. Treasury.Footnote 57
The best course of action for the United States, then, would rest not upon restrictive measures to limit U.S. deficits but rather upon growth-oriented programs aimed at maintaining “the continued health of that economy.” He reflected that “the traditional prescription for nation facing a big deficit was to tighten its belt,” but he maintained that such austerity measures as federal spending cuts would trigger a recession. The result would be “fewer tax dollars” in government coffers—an outcome that would contradict the intended consequences of cutting spending to reduce the deficit.Footnote 58
Going further, Goldfinger recommended the elimination of the gold-dollar peg altogether, and he endorsed central bankers’ decision to pursue a fundamental realtering of the international monetary system through the introduction of International Monetary Fund special drawing rights (SDRs). SDRs, described as “paper gold,” would supplement dollars in providing international liquidity. “The sooner the world reaches a stage of treating gold as just another commodity such as copper, wheat or silver,” Goldfinger asserted, “the better off all of us will be.” In his view, while spending cuts to preserve the gold-dollar link would produce recession, the introduction of SDRs would “expand the supply of international currency” to “provide the basis for the continuing expansion of world trade.”Footnote 59 Applying the principles of monetary expansion at the global level, he concluded that this expansion of SDRs would promote global economic growth.
In this, he echoed the analysis of economist Leon H. Keyserling. Keyserling described the international “commitment to this yellow metal” as “both slavish and superstitious.” Moreover, he maintained that delinking international accounts from settlement in gold would prove crucial to promoting economic growth.
Since the gold supply of the world is increasing at only about one per cent a year, while the monetary systems underlying both domestic economies and international exchange must expand sufficiently to support fundamental economic expansion at annual rates of 5 per cent and much higher (depending upon the country), any substantial connection between gold and monetary systems becomes progressively crippling.Footnote 60
Instead, Keyserling proposed “application on the international front, with appropriate modifications, of something similar to what our own Federal Reserve System can be at it best.”Footnote 61 In this, his recommendations largely mirrored proposals for the International Monetary Fund to play an enlarged role in the allocation of special drawing rights to increase international liquidity.
Despite Goldfinger’s optimism, the strained political relations between Western European central bankers and the Johnson administration suggested the implementation of SDRs would not proceed smoothly. Central bankers negotiated agreements that advanced the implementation of SDRs in Stockholm in March 1968. France, however, continued to insist that the first SDR allocation must remain contingent on improvements in the United States’ payments position. Its representatives therefore did not sign the final agreement in Stockholm.Footnote 62 Facing international pressure, Johnson insisted in a televised address the following week that “the United States just must bring its balance of payments to—or very close to—equilibrium.” In the same address, he announced that he would not run for reelection.Footnote 63
As proposed budget cuts made their way through Congress, the AFL-CIO mustered its political resources in an effort to block the measures.Footnote 64 The AFL-CIO Executive Council stated that it was “unalterably opposed to the meat-ax approach to gutting the budget.” “We will support a fair and equitable tax increase on a temporary basis,” the council maintained, “but the actions proposed by the conferees will set the United States on a course that can lead only to chaos in domestic and international policies.”Footnote 65 Meanwhile, the federation’s publications insisted that legislation must address “grossly unjust tax loopholes” and “correct tax injustices toward America’s low and moderate income families.”Footnote 66
Despite vigorous labor opposition, Johnson signed the Revenue and Expenditure Control Act into law on June 28, 1968. Its passage marked a landmark shift away from the administration’s growth orientation, and it was predicted to reduce the federal deficit by $20 billion in fiscal year 1969. The law increased income taxes by 10 percent, and, as a condition for passage of the tax increase, it mandated that the administration reduce federal spending estimates for fiscal year 1969 by $6 billion. Contradicting AFL-CIO calls for full employment through public hiring, the act also required a reduction in federal employment to June 1966 levels.Footnote 67
Meanwhile, rising interest rates attracted short-term financial flows from Western Europe into the United States.Footnote 68 Nevertheless, such improvements were tenuous. In the absence of central bank cooperation under the Gold Pool, the dollar was now more vulnerable to the whims of short-term investors eager to maximize profits. Any signs of a weakening dollar could, and would, provoke outflows of “hot money,” just as rising interest rates now attracted such inflows.
Trade Deficits, Dollar Crises, and the Burke-Hartke Bill, 1968–1973
At the same time, the AFL-CIO leadership increasingly feared that rising imports and capital outflows threatened to undermine the industrial underpinnings of postwar liberalism. In this context, the AFL-CIO laid out its most far-reaching proposals to restrain multinational corporations. Although union leaders primarily concerned themselves with the job impacts of import competition and capital flight, they also continued to criticize the activities of multinational firms in terms of their impact on the balance of payments. In part, they did so in a strategic effort to secure their desired policies. At the same time, the federation’s leadership also retained hope that restraining capital outflows would allow for a renewed commitment to growth-oriented fiscal and monetary policies.
By the end of the 1960s, the AFL-CIO had begun to abandon its postwar commitment to the Democratic Party’s trade liberalization program. The conclusion of the Kennedy Round of General Agreement on Tariffs of Trade negotiations in 1967 brought results that the AFL-CIO found disappointing. The federation had endorsed the start of negotiations in 1962 in the hope of securing concessions from foreign countries. Nevertheless, by 1967, the federation’s national convention ultimately concluded that their “great expectations” for the Round had “not been fully realized.”Footnote 69 AFL-CIO leaders’ optimism that the Round would bring concessions from foreign countries dissipated.Footnote 70 “Most countries,” the federation’s 1969 national convention concluded, had “moved to manage their national economies—with direct and indirect aids for exports and bars to imports.”Footnote 71
Moreover, the shift in AFL-CIO policy came in response to multinational corporations’ novel strategies for offshoring production. Reduced trade barriers, improved communication and transportation technologies, and government policies enabled multinational firms to integrate production processes across national lines.Footnote 72 U.S. corporations thus began to offshore production of component parts, particularly in labor-intensive industries like textiles and microelectronics, to countries of East Asia and Latin America that sought to attract private investment to promote their own national growth and development.Footnote 73 Most prominently, Mexico’s Border Industrialization Program encouraged U.S. corporations to establish facilities along the U.S.-Mexican border. It exempted firms’ imported materials along a 12.5-mile strip from the country’s relatively high tariff rates but required firms to reexport the finished products. U.S. firms thus transferred components to Mexican assembly plants duty-free and exported the more valuable finished products back to the United States.Footnote 74
Rising imports ultimately contributed to the United States’ balance of payments woes. Over the course of the late 1960s, the U.S. trade surplus dwindled as import growth outpaced export growth.Footnote 75 As economic historians have noted, the U.S. trade surplus had historically compensated for dollar outflows in the form of foreign aid and military expenditures to balance U.S. payments accounts.Footnote 76 The country’s declining trade surplus, and its ultimate shift to deficit in 1971, thus limited its ability to cover its foreign spending deficits.
AFL-CIO spokesmen highlighted this relationship between imports and the U.S. balance of payments in their own activism for a revised U.S. trade policy, and they pinned particular blame for rising imports on multinational corporations. Legislative Director Andrew Biemiller warned that “the operations of foreign governments, in conjunction with the private interests of U.S. firms located abroad, can possibly have an adverse effect on the trade and payments position of the United States.” He emphasized that multinational firms’ “intra-company transactions … not only supplant some U.S. exports but also add to U.S. imports.” “Obviously,” Biemiller concluded, “the best interests of these companies and the basic interest of the United States are not always identical.”Footnote 77
The actual impact of multinational firms’ activities on the U.S. balance of payments remained difficult to determine because government data and reporting remained lacking. The AFL-CIO prioritized enhanced federal supervision of multinational firms’ activities as a necessary component of a reevaluation of U.S. trade policy.Footnote 78 Nevertheless, into the 1970s, the relationship between multinational corporations’ foreign investments and the U.S. trade balance remained a contentious topic. Although leaders of multinational corporations like General Motors maintained that their foreign subsidiaries facilitated U.S. export promotion, labor leaders continued to insist that exports from U.S. firms’ foreign subsidiaries and licensees contributed to the rise in U.S. imports.Footnote 79
Feeding concerns about multinational production and rising imports, the United States experienced four consecutive months of trade deficits beginning in April 1971. In July, Commerce Secretary Maurice H. Stans predicted, correctly, that the United States might experience an annual trade deficit for the first time since 1893. This trend, which Stans regarded as “frightening,” also alarmed Treasury Secretary John B. Connally, who warned that the declining trade surplus would undermine the United States’ ability to balance its international payments.Footnote 80
When the AFL-CIO Executive Council gathered in Atlanta in May 1971, then, it adopted a nine-point legislative program to restrict imports and regulate the activities of multinational firms. It proposed the enactment of quotas on nearly all imports based on average import levels from 1965 through 1969. The quotas would be governed by what came to be known as a “sliding door” concept, by which a quota would be relaxed as U.S. production of the item rose. Exceptions would be made for component parts needed for U.S. production and for items covered under negotiated voluntary export agreements. Nevertheless, the basic purpose of the measure would be to freeze existing trade ratios between the United States and its trade partners to ensure that rising imports would not threaten existing industries.Footnote 81 The program also included the removal of tax incentives for foreign investment, more effective capital controls, federal accounting standards for U.S.-based multinational firms, and presidential authority to deny licensing and patent agreements deemed contrary to the national interest.Footnote 82
The international dollar crisis of August 1971 fanned the flames of the AFL-CIO’s uproar over trade and multinational production. In response to rising unemployment, the Federal Reserve under Arthur Burns began to increase the money supply during the first half of 1970 and continued the policy of monetary easing through the start of 1971.Footnote 83 As interest rates fell, investors moved short-term “hot money” from the United States to Europe to capitalize on the higher interest rates.Footnote 84 The May 1971 announcement that the U.S. trade balance had shifted to deficit deepened investors’ suspicions that the dollar was overvalued and thus accelerated this sell-off of dollars.Footnote 85 Looking to unload their overvalued dollars, investors converted their dollars in massive quantities to stronger currencies.
By August, the dollar was in crisis. On Friday, August 6, the congressional Joint Economic Committee’s Subcommittee on International Exchange and Payments issued a report, titled “Action Now to Strengthen the Dollar,” which stated the dollar was overvalued. The report incited fear that the U.S. government would devalue the dollar and thus accelerated the fire sale of dollars. Significantly, U.S.-based multinational firms were among the most active participants in this sell-off, and the Euromarkets facilitated these rapid cross-border transactions. During the week following the announcement, foreign central banks bought roughly $3.7 billion to prevent the flood of dollars into international money markets from raising the values of their own currencies relative to the fixed dollar.Footnote 86
Nixon responded to the crisis by eschewing multilateral deliberations in favor of devising a unilateral solution. After gathering his top economic advisers at Camp David, he announced his “New Economic Policy” on August 15.Footnote 87 The program ended the U.S. Treasury’s promise to accept and convert dollars into gold, the centerpiece of the Bretton Woods monetary system. It also included a 10 percent tax on dutiable imports into the United States and a formal system of wage and price controls to redress the United States’ balance of payments woes and tamp inflation.Footnote 88 Scholars have described the Nixon administration’s unilateral devaluation as a nationalist measure intended to revive U.S. export capabilities.Footnote 89
Nevertheless, in the view of the AFL-CIO, Nixon’s actions did not go far enough to prioritize U.S. national interests in its handling of international economic matters. George Meany called an emergency Executive Council meeting on August 19, which decried the alleged inequities of the wage and price control program.Footnote 90 The Federation’s criticisms, however, extended beyond the issue of wage and price controls. The Executive Council endorsed the dollar devaluation but demanded “an early and thorough congressional investigation of international speculation against the American dollar.” It identified “American-owned international companies and banks” as primary suspects and asserted that the “undercutting” of the dollar by U.S.-based multinational firms “must never be allowed to happen again.”Footnote 91
Nor was the AFL-CIO satisfied with the across-the-board import tariff, which it considered “at best a temporary stopgap” from which a large portion of U.S. imports remained exempt.Footnote 92 The AFL-CIO Executive Council charged that the tariff did “very little” to redress “the major trade problem created by the U.S.-based multinational corporations and international banks.” They urged the imposition of “taxes on licensing and patent agreements and on overseas profits of US corporations”—tactics the “president had studiously avoided”—as the best strategy to redress the U.S. trade deficit, and thus improve the United States’ overall balance of payments.Footnote 93
In September, Democrat James Burke of Massachusetts ended the summer with a crescendo by packaging much of the AFL-CIO’s nine-point program in the Foreign Trade and Investment Act, which he introduced in the House of Representatives.Footnote 94 Better known as the Burke-Hartke bill, in reference to Burke and his Senate counterpart, Democrat Vance Hartke of Indiana, various iterations of the proposed legislation reached the House and Senate floors between 1971 and 1973.Footnote 95 The imposition of import quotas on most products, along with more stringent taxation of foreign earnings, executive authority to restrict foreign investment, and enhanced labeling requirements, were among its foremost provisions.
European, Japanese, and North American leaders agreed to the dollar devaluation at a meeting at the Smithsonian Institution in December, but AFL-CIO economists maintained that the currency realignment failed to address the most pressing problems in international economic policy. Nat Goldfinger dismissed the Nixon administration’s claims that the devaluation would support five hundred thousand U.S. jobs. “The action on exchange rates and the dollar does not get at the basic, long-range problems of trade,” Goldfinger said, nor did it address the “problems of the multinational firms and their export of jobs, technology, and capital.”Footnote 96
In subsequent congressional hearings on the dollar devaluation, Biemiller echoed Goldfinger’s criticism and called for a more far-reaching transformation of U.S. international economic policy. Although Biemiller endorsed the devaluation, he warned that “US balance of trade and payments problems are not merely price problems, as devaluation would assume.” Devaluation, he suggested, “cannot deal with more than a fragment of the problem.” He thus concluded by pressing for passage of the Burke-Hartke bill, which he suggested “would provide the first comprehensive re-writing of tax, trade and investment law” to address “all the complex issues that have made previous legislative remedies hopelessly outdated”—multinational production, international speculation, and foreign countries’ industrial policies and import protections.Footnote 97
To AFL-CIO economists, the British decision to float the pound amidst a sterling crisis in June 1972 only confirmed their negative assessment of the Smithsonian Agreement. “It is becoming more and more clear,” AFL-CIO News reported, “that a completely new approach to the problems of international trade must be made.” The newspaper criticized the devaluation of sterling as “part of the ‘managed economy’ that is characteristic of today’s international trade picture.” In their view, the devaluation marked yet another action by a foreign government to promote its own national trading interests, even as it bore the “superficial aspect” of allowing “economic nature” to “take its course” in accordance with “the free trade tradition.” In their view, the time had come to redesign trade policies to address “today’s realities rather than yesterday’s slogans.”Footnote 98
In the end, the AFL-CIO’s efforts backfired. As historians have shown, business associations mobilized in a vigorous campaign against the Burke-Hartke bill. In so doing, they crafted a justification for freer trade and investment that stalled further efforts to regulate international business.Footnote 99
Meanwhile, the partial removal of wage-price controls, revelations that the U.S. trade deficit had worsened in 1972, and Italian and Swiss decisions to float their currencies set off yet another fire sale of dollars in February 1973. Distrusting the value of the dollar, European central banks abandoned their efforts to absorb excess dollars to maintain pegged exchange rates. They instead allowed their own currencies to float, thereby allowing supply and demand to determine the values of their currencies in international money markets. The following month, U.S., European, and Japanese finance ministers gathered in Paris and officially agreed to end the gold-dollar fix. The Bretton Woods monetary system was dead, and a new era of financial globalization had arrived.Footnote 100
Conclusion
This article has explored how the AFL-CIO attempted, but ultimately failed, to shore up postwar growth liberalism by advocating for capital controls and import protections. In the view of AFL-CIO economists, expansionary fiscal and monetary policies were crucial for promoting full employment and the growth of the U.S. industrial economy. Nevertheless, U.S. political leaders came under pressure to tamp inflation through fiscal and monetary restraint as foreign countries grew wary about the value of the dollar and international financial flows accelerated. Multinational firms, moreover, lobbied vigorously against the measures proposed in the Burke-Hartke bill, and rapid dollar flows continued unabated in unregulated Euromarkets. As a result, AFL-CIO efforts to maintain low interest rates and fiscal stimulus by restricting private dollar outflows ran aground.
Ultimately, postwar growth liberalism, and organized labor’s fragile power within that order, rested upon a unique configuration of economic, social, and political circumstances that proved fleeting. The United States emerged from World War II as a hegemonic global power. Low interest rates, low inflation, and economic growth reigned as U.S. payments deficits promoted international liquidity under the dollar-centered Bretton Woods system. Expansionary fiscal policies, meanwhile, helped to counter downturns in the business cycle. Under these conditions, corporations invested in capital-intensive industries that demanded a large pool of industrial labor, a situation that compelled managers to bargain with labor unions to maintain production.Footnote 101 These capital-intensive industries fueled trade surpluses that compensated for deficits in other areas of the U.S. current account. When the dollar’s value did come under speculative pressure, Cold War–era security alliances with European powers helped to solidify monetary cooperation in support of the Bretton Woods system.Footnote 102
As capital became increasingly mobile and foreign countries’ willingness to hold dollars faded, however, these circumstances passed away. As U.S. defense spending exacerbated the country’s payments deficits, foreign countries’ willingness to support the dollar by holding excess dollar reserves waned. The benefits of dollar outflows in promoting international liquidity soon came to be outweighed by growing concerns about inflation. Economic recovery and growth abroad, combined with the expansion of U.S. multinational firms, contributed to rising U.S. imports that sapped the U.S. trade surplus. The era of low inflation, low interest rates, and persistent growth in the United States gave way to new distributive conflicts as policymakers struggled to tamp inflation. The AFL-CIO’s future would ultimately hinge upon its ability to adapt to these new circumstances.
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