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REGNERY GATEWAY • CHICAGO
CAUSES AND CONSEQUENCES
A STUDY OF
. except by a reviewer who may quote brief passages in a review. International finance—Addresses. International Monetary Fund—Addresses. N. All rights reserved. including information storage and retrieval systems. Published by Regnery Gateway. Inc. lectures. essays. and 1945 are copyright © by the New York Times Company. lectures. 1944. New York Times editorials of 1934.H36 1983 332. 360 West Superior Street Chicago. 4. essays.)—Addresses. 3. 1. Reprinted by permission. United Nations Monetary and Financial Conference (1944: Bretton Woods. H. essays. lectures. lectures. Inflation (Finance)—Addresses. No part of this book may be reproduced in any form or by any electronic or mechanical means. I. 2. Illinois 60610-0890 Library of Congress Cataloging in Publication Data Hazlitt. essays. Henry.Copyright ©1984 by Henry Hazlitt. 1894From Bretton Woods to world inflation. without permission in writing from the publisher. Title.4'566 83-43042 ISBN 0-89526-617-2 Manufactured in the United States of America. HG3881.
23. The Return to Gold For Stable Exchanges For World Inflation? 31 35 39 4. 1718. 24. Nationalism The CED on Bretton Woods Silver Boys in Bretton Woods The Coming Economic World Pattern 115 119 123 127 . 2. 16. 11. How Will it Stabilize? The Monetary Conference Results at Bretton Woods An International Bank? The Monetary Fund To Make Trade Free Mr. 19. 10. 3. 7. 13. 22. 9. 20. Gold Vs. Europe's Monetary Maze Bankers on Bretton Woods The Fund and the Bank Freedom of Exchange Supply Creates Demand Bretton Woods Proposals More on Bretton Woods The Bretton Woods Bill Money Plan Obscurities 77 81 85 89 93 97 101 105 109 21. 14. 8.CONTENTS Introduction Part I: Birth of the Bretton Woods System 7 1. 15. Aldrich's Monetary Plan International Money Plans 43 47 53 57 61 65 69 73 12. 6. 5.
Part lit The Aftermath
25. 26. 27. 28. 29.
Excerpts from Will Dollars Save the World? Collapse of a System The Coming Monetary Collapse World Inflation Factory What Must We Do Now?
145 151 155 159 172
The purpose of this book is to re-examine the consequences of the decisions made by the represen tatives of the forty-five nations at Bretton Woods, New Hampshire, forty years ago. These decisions,
and the institutions set up to carry them out, have led us to the present world monetary chaos. For the first time in history, every nation is on an inconvertible
paper money basis. As a result, every nation is in
flating, some at an appalling rate. This has brought economic disruption, chronic unemployment, and anxiety, destitution, and despair to untold millions of
It is not that inflation had not occurred before the Bretton Woods Conference in July, 1944. Inflation's widespread existence at the time, in fact, was the very reason the conference was called. But at that meeting, chiefly under the leadership of John Maynard Keynes of England, all the wrong decisions were made. Inflation was institutionalized. And in spite of the mounting monetary chaos since then, the world's political officeholders have never seriously reexamined the inflationist assumptions that guided the authors of the Bretton Woods agreements. The main
institution set up at Bretton Woods, the International
Monetary Fund, has not only been retained, its infla
tionary powers and practices have been enormously expanded.
Yet this book would never have been put together had it not been for the encouragement and initiative of my friends, Elizabeth B. Currier, Executive Vice President of the Committee for Monetary Research & Education, and George Koether. We were talking about the current world monetary chaos, and one of them referred to the possible role played by the
monetary system set up at Bretton Woods. I happen
ed to remark that when the conference was taking place I was an editor on The New York Times, that I was writing nearly all its editorials on the Bretton Woods decisions as they were being daily reported, and that in them I was constantly calling attention to the inflationary consequences those successive deci
sions would lead to.
of them. The thoroughness of his research is shown by the fact that these included not only Times editorials of mine which appeared between June 1, 1944 and April 7, 1945, but one that was published on the virtues of the gold standard on July 9, 1934. His discrimination was such that I am confident he
Both Mr. Koether and Mrs. Currier immediately suggested that it might serve a useful purpose to reprint some of these editorials now. I told them I had long ago sent my New York Times scrapbooks, together with other papers, to the George Arents Research Library in Syracuse University, and that the scrapbooks were the only place I knew of where these editorials had been identified as mine. George Koether undertook to make the trip to Syracuse, studied the scrapbooks, and sent me photostats of 26
these inflationary conse quences would have been recognized. 1944/5. and (5) an article in The Freemany August. 3. 1967. (2) a column in Newsweek magazine of Oct. "The Coming Economic Collapse. When I began to re-read these old New York Times editorials I was reminded that I had summarized all the misgivings expressed in them in an article in The American Scholar of Winter. en titled "World Inflation Factory. Nov." (4) another column for the Los Angeles Times Syndicate of March 23. Of the 26 editorials he sent. and in the American Con gress and Administration. under the title "The Coming Economic World Pattern: Free Trade or State Domination?" I republish that here also. (3) my column for the Los Angeles Times Syndicate. I am greatly in debt to his selective judgment. but to show that if sound economic and monetary understanding had prevailed in 1945 at Bretton Woods. 1971. 15. and the Bretton Woods proposals rejected. "Collapse of a System." which predicted that the United States would be forced off the gold standard— an event that actually took place on Aug. particularly The International Monetary Fund. I am reprinting 23. 1949. 1969." calling attention . on the devaluation of the British pound and twenty-five other world currencies in the two weeks preceding. And once I had begun the brief history that follows of the actual workings of the Bretton Woods institu tions. I decided to include five other pieces: (1) excerpts from my book Will Dollars Save The World? which ap peared in 1947.did not miss a single essential comment. 1971. I feel that these editorials do warrant republication at this time. 21. not to prove that my misgivings turned out to be justified.
and The Freeman for giving me per mission to republish these articles. unlike the Fund. in 1949. it was not called upon to make enormous loans automatically. in calling attention to them. For one ex ample: in the effort not to seem "extreme". and was far too kind to the pro posed International Bank. to those who bothered to read the text of the Bretton Woods agreements. The article setting it up even went so far as to stipulate that a committee selected by the Bank must learn whether a would-be borrower was "in a position to meet its obligations"! Yet obvious as these dangers should have been. but allowed to exercise some discre tion. if those in positions of power had really understood what they were doing and had combined that understanding with even a minimum of political courage and responsibility. I found myself almost alone. (My editorials mentioned at the time the few persons and groups who did. Newsweeh.) 10 . in 1969. In my editorials for The New York Times. because I had always to bear in mind that I was writing not in my own name but that of the newspaper." All of these pieces and their predictions show that the monetary chaos and world inflation could have been stopped.once more to "the inherent unsoundness of the Inter national Monetary Fund system. even in 1944. The American Scholar. in 1971. The Foundation for Economic Education. simply because. The Los Angeles Times Syndicate. particularly in the journalistic world. I wish to express my thanks here to The New York Times. or at least greatly diminished. I looked for mitigating merits. or even in 1944. the understatement of the case against the defects of the Bretton Woods agreements was deliberate.
1982. and twelve years after the agreements collapsed from their inherent in firmities. with the comparatively stable exchange rates for the 25 years before Bretton Woods openly collapsed in August." She began by praising the original Bretton Woods scheme as "a way of admitting that nobody could go it alone and pros per any longer. remind ourselves of what really went wrong." She then offered a complicated misexplanation of what had gone wrong since then. when inconvertible paper cur rencies were daily depreciating nearly everywhere. But The Wall Street Journal forgot that Bretton Woods worked as intended as long as it did only by putting an excessive burden and responsibility on one nation and one currency. enti tled "Bring Back Bretton Woods." It may be said in extenuation that the editorial writer was comparing the situation in 1982. 1982. Let us. Even the usually perceptive Wall Street Journal published an editorial as late as June 22. Another and perhaps more typical example of the confusion on this subject that still prevails in the journalistic world today.Even today. The Bretton Woods agreements never seriously considered the return of each signatory nation to a gold standard. we hear journalistic pleas for their restor ation. at the cost of repetition. and ended by suggesting that the real trouble was that President Reagan was preventing the International Monetary Fund from lending even more billions (to already bankrupt debtors). nearly forty years later. even boasted that they set up "the exact opposite of a gold standard. appeared in a column by Flora Lewis in The New York Times of October 19. when President Nixon closed the American gold window. entitled "A World Reserve Plan." In 11 . Lord Keynes. their principal author. 1971.
what Bretton Woods really set up was what used to be called a "gold-exchange" standard. had acted far more responsibly. The Bretton Woods system continues to do great harm because the dollar.23 in gold to redeem every $100 of paper promises. and our own banking and currency authorities. our gold reserves amounted to only about 2 per cent of our outstanding currency and demand and time bank deposits ($10. A gold-exchange standard can be workable if only a few small countries resort to it.500 million of M2). $454. In other words. Every other country in the scheme undertook simply to keep its own currency unit convertible into dollars. Even if the American Congress. Neither the politicians of foreign countries.any case. It cannot indefinitely operate when nearly all other countries try to depend on just one for ultimate gold convertibility. though no longer based on 12 . realized the awesome President Nixon closed the American gold window on August 15. The ultimate gold reserves on which the conversion burden could legally fall under the system must have been only some small fraction of 1 per cent of the total paper obligations against them. The United States alone undertook (on the demand of foreign central banks) to keep its own currency unit directly convertible into gold.132 million of gold vs. the original Bretton Woods system was inherently impossible to maintain. there was only $2. But this takes no account of outstan ding "Eurodollars. 1971." or even of the outstanding cur rency and bank deposits of all the foreign signatories to Bretton Woods. nor banking and currency authorities to refrain from ex cessive credit expansion. responsibility that this scheme put on the American The result was that when unfortunately of our own.
How these officials decide that these balance of payment problems are merely "temporary" I do not know. nor the period for which the loans were to be made. the chief institution set up by the agreements." The chief way it was proposed to do this was to have all the member nations make a quota of their currencies available to be loaned to those member countries "in temporary balance of payment difficulties." The individual na tions whose currencies were to be made available were not themselves to decide how large their loans to the borrowing nations should be. the loans were made almost automatically. like the Inter national Money Fund and the Bank. made by the inter national bureaucrats who operate the IMF. D. 1944. that the International Monetary Fund (IMF). and not until March 1. 1947. began financial operations at its headquarters in Washington. continue to make immense new loans to irresponsible and im provident governments. In any case. in fact. The ostensible purpose of the IMF was "to promote international monetary cooperation. continues to be used (as of this writing) as the world's primary reserve curren cy. and drafted Articles of Agreement. Let us now look chronologically at the world monetary developments of the last forty years. It was not until December. C. Until recently. that the required number of coun tries had ratified the agreements. at the request of the borrowing nation. The representatives-of some forty-five nations conferred at Bretton Woods from July 1 to July 22. 1945. 13 . the "temporary" loans normally have run from one to three years. while the institutions it set up. This decision was and is.gold and itself depreciating.
encouraging its unions to fix domestic wage rates too high. is most often merely a symptom of a much wider and more basic ailment. in short. Since nearly every government today—particularly of "developing" countries—is practicing at least a few of these policies. undermining property rights. encourages them to continue their socialist and inflationist course. It is possible. domestic or foreign. in ef fect. the IMF. balance-of-payments difficulties are brought about by unsound policies on the part of the nation that suffers from them. "balance-of-payment dif A "balance-of-payments difficulty". imposing excessive corporation or individual income taxes (destroying incentives to production and preventing the creation of sufficient capital for investment). As it is. or being forced into an essentially defensive war. But most of the time. they would be forced to make drastic reforms in their policies to obtain such loans. it is not surprising that some of these countries will get into ficulties" with others. a long drought. If nations with "balance-ofpayments" problems did not have a quasi-charitable world government institution to fall back on and were obliged to resort to prudently managed private banks. following other anti-capitalistic policies. attempting to redistribute income. that a nation could get into balance-of-payments difficulties through no real fault of its own—because of an earth quake. to bail them out. of course. enacting minimum wage rates. imposing price ceilings. encouraging its citizens or its own govern ment to buy excessive imports. or even imposing outright socialism. These may consist of pegging its currency too high.It should be obvious on its face that this whole pro cedure is unsound. The IMF loans not only 14 .
1981. the SDR was valued on the basis of the market exchange rate for a basket of the currencies of the 16 members 15 . 1980. Amounts of SDR 4 billion each were allocated on January 1. (These loans.) But the Fund has increased world inflation in still another way. In view of the ease with which this fiat world money was created. called "Special Drawing Rights" (SDRs). 1979. through December. incidentally. by a stroke of the pen. In 1970. its limited volume (even though in excess of SDRs 20 billion) may strike many people as surpris ingly moderate. I should define more specifically just what an SDR is. During the first period. on January 1. 1980. were allocated to members—at their option—in pro portion to their quotas over specified periods. not contemplated in the original Ar ticles of Agreement of 1944. These SDRs were created out of thin air. are largely made at belowmarket interest rates. 1979. From July.encourage continued inflation in the borrowing coun tries. it created a new currency. SDRs in existence now [April. 1970-72. There were no further allocations until January 1. according to the Fund. in the words of the IMF. "to meet a widespread concern that the growth of international liquidity might be inadequate" (A Keynesian euphemism for not enough paper money). 1974. These SDRs. SDR 9. 1982] total SDR 21. about 5 per cent of present international non-gold reserves. as we shall see.3 billion was allocated.4 billion. But its creation. but themselves directly add to world inflation. and January 1. set an ominous precedent. They were created.
on August 25. It is designed. The SDR serves as the official unit of account in keeping the books of the IMF. the SDR.083. The currencies and their weights in the basket are the U. the foreign tax payer has lost again. The U.. Treasury Depart ment can make a similar boast. composed of a basket of paper currencies. A number of countries have pegged their currencies to the SDR—i. To resume the history of the Bretton Woods agreements and the IMF: Because the Fund was 16 . What neither the Fund nor the American Treasury bother to point out is that this gold has an enormously higher value to day than at the time the sales were made. 1982." But it is worth noting a few things about it. the SDR was valued at $1. the deutsche mark (19 per cent). and the yen.) More importantly. The American and. S. 1981. French franc.S. is itself a paper unit governed by a weighted average of infla tion in five countries and steadily depreciating in purchasing power. the basket has been composed of the currencies of the five members with the largest ex ports of goods and services. The profit has gone to world speculators and other private persons.e. in the words of the Fund. (For example." and proudly points out that from 1975 to 1980 it sold 50 million ounces of gold—a third of its 1975 holdings. Its value changes every day in relation to the dollar and every other national currency.with the largest exports of goods and services. and pound sterling (13 per cent each). to "eventually become the prin cipal asset of the international monetary system. Yet the IMF boasts that it is still its policy "to reduce gradually the monetary role of gold. Since January.099 and six days later at $1. in part. dollar (42 per cent). to a falling peg.
This loan and its consequences were typical. A $25 million credit granted by the fund to France." the government of Great Britain slashed the par value of the pound overnight from $4. Yet on Dec. the IMF contended that the trade deficits of European countries by "would not in be appreciably narrowed changes their currency parities. It began oper ations on March 1. Within a single week twenty-five nations followed its example with a similar devaluation. but does positive harm. is being used to keep the franc far above its real purchasing power and at a level that encourages imports and discourages exports. Its managers are virtually without power to insist on internal fiscal and economic reforms before they grant their credits.03 to $2. 81-82) that: The [International Monetary] Fund in its pre sent form ought not to exist at all. Will Dollars Save the World. As I wrote in Newsweek of Oct. 1947.created on completely mistaken assumptions regard ing what was wrong and what was needed. In a book published that year. 1946. 3. 1949." It 17 . 18." The countries themselves finally decided otherwise. for example. I was already pointing out (pp. precisely to restore its trade balance and "to earn the dollars we need. 18. On Sept. Such a use of the resources of the Fund not only fails to do any good. its loans went wrong from the very beginning.80. 1949: "Nothing quite comparable with this has happened before in the history of the world. This merely prolongs the unbalance of French trade and creates a need for still more loans.
1971. I simply pointed in detail to the conditions already existing in March. 1969." and "one of these days the United States will be open ly forced to refuse to pay out any more of its gold at tually occurred two-and-a-half years later. But the major culprits are those who set up the Bretton Woods system and those who so uncritically accepted it. But next to no one in authority was paying or calling any attention to these conditions—no one except a negligible few. that made this outcome inevitable." This ac 15. on Aug.was largely the existence of the IMF and its misguided lending that had encouraged a continuance of pernicious economic policies on the part of individual nations—and still does. Since the United States went off gold. most of the blame for that action (on the part of those who already believed in the gold standard or have since become converted to it) has been put on President Nixon. "The Coming Monetary Collapse". Let us now take another jump forward in our history. who made the announcement. $35 an ounce even to foreign central banks. through the IMF. and some of the results have become evident. Even if the United States had itself pursued a far less inflationary policy in the twenty-seven years from 1944 to 1971. The fulfillment of this prophecy did not mean that I was the seventh son of a seventh son. 1969. No single nation's curren cy could long be expected to hold up the value of all the currencies of the world. 18 . In a column published on March 23. He doubtless deserves some of that blame. I predicted that: "The international monetary system set up at Bretton Woods in 1944 is on the verge of breaking down. it could not be expected indefinitely to subsidize.
30. SDR 1. total purchases. are still there. SDRs. Turkey. The total amount of loans outstanding as of Sept.S. Its books are kept in Special Drawing Rights (SDRs) which are artificial entries and nobody's pocket money.567 million (U. and it broke. 1982. Pakistan. The world dollarexchange system was inherently brittle. Its loans are seldom called loans but "pur chases/' because a country uses its own money unit to "buy.879 million). Yugoslavia. or any other national currencies. 30.469 million." So. $18.346 million. 30.766 million. as of Sept.the International Bank. still draining the countries with lower inflations to subsidize the higher inflations of others. as of Sept. an unprecedented situa tion that has already caused appalling anxiety and human miseryYet the supreme irony is that the Bretton Woods institutions that have failed so com pletely in their announced purpose. 1982.697 million (U. 1982. Repayments to the Fund are called "repurchases of purchases.744 million.079 million. including "reserve tranche" purchases. the inflations of other countries. was SDR 16. and led to only monetary chaos instead. The leading half-dozen borrowers were: In dia. Again. South Korea.S. $71. SDR 1. SDR 1. and 19 . total repurchases of purchases amounted to SDR 36.148 million. Yet to describe exactly what the IMF has done up to the present moment is not easy to do in non technical terms." through the IMF. SDR 1. on the IMF's books since it began operations have amounted to SDR 66. and gold conversion. dollars. SDR 1. So today we have depreciating inconvertible paper currencies all over the world. The Fund has its own jargon.020 million). still operating.
1983. Before one additional cent would be put up by the IMF. the private banks would have to roll over $20 billion of their credits to Mexico maturing between August.400 commercial banks with loans out to Mexico. and the end of 1984. he told them. The Fund had also agreed to a similar package for Argentina. All this may seem momentarily reassuring. Similar con ditions were later attached to the Fund's loans to Argentina and Brazil. A sobering glance ahead was published in New York Times of Jan. warned the private banks that had already lent billions to Mexico that unless they came up with more. SDR 780 million—a total of SDR 7. Many had feared in the fall of 1982 that Mexico would simply refuse to make payments on its $85 billion foreign debt. can only be guessed at. of course. The executive directors of the Fund had just approved a $3. thereby creating an even worse international financial crisis. the Philippines. but the outlook is ominous. the Frenchman Jacques de Larosi^re. before making the loan. One for Brazil had been almost completed.9 billion loan designed as an emergen cy bailout of the near bankrupt Mexico. which already had loans out to thirty-three hard-pressed countries. Lined up for further help from the Fund. So the Managing Director of the IMF. and Portugal. 9. So the IMF is now using its loans as leverage to force the extension of old and the making of new private loans.the Philippines. The IMFs total outstanding loans had then risen to $21 billion. The future. At least it tries to put the main part of the 20 . and extend $5 billion in fresh loans. were Chile.193 million in U.S. 1982.588 million or $8. they might find themselves with nothing at all. He met a delegation representing 1. currency.
As reported in The New York Times of Jan.. formed in 1962) agreed to make available a $20 billion emergen cy fund to help deeply indebted countries. the rescuing governments plan to throw still more money at near-bankrupt countries to encourage them to continue the very policies of over-spending that brought on their predicament. . On Jan. to $90 billion. senior monetary officials from 10 major industrial nations (the Group of 10. Major in dustrial governments also plan to increase the IMF's own lendable capital this year by about 50 per cent. 1983. The government authorities hope that private banks then would also help these countries by agreeing to delay debt payments and providing more credit so the poorer countries would not be forced to curb im ports and thus deepen the world recession. 18. 1983: The new fund is to be established by tripling the Group of 10's current commitment to lend the IMF an additional $7 billion whenever it runs short of money and by relaxing the rules under which this aid is provided. Thus. 1983. But what is all this leading to? May it not consist merely of throwing good money after bad? How long can the international jugglers keep the mounting un paid debt in the air? They cannot be blamed for not making a new try.. 17.future burden and risk on the imprudent past private lenders (and their creditors in turn) rather than on the world's taxpayers and national currency holders. In an editorial on January 25. The Wall Street Journal commented: "What started out as a relatively modest effort to increase international monetary 21 .
And among the influential politicians in office today he is not alone.reserves is turning into an all-out assault on the U. The only course for a govern ment that has begun inflating. to continue hav ing any stimulative effect. but much less 22 . It would be like trying to reduce a man's pain by cutting off his gangrenous leg a little bit at a time. but typical. is reported to be "worried that too much IMF induced austerity could bring about even sharper contractions in world economic activity". to balance its budget without delay. bring a crisis. Donald T. once begun. of course. In order for inflation. its pace must be constantly accelerated.." He was not far wrong. and to make sure its citizens under This would. In 1971. Even politicians who do not consider themselves inflationists are afraid to advocate bring ing inflation to a halt. he said: "We are all Keynesians now. if it hopes to avoid hyper-inflation and a final "crack-up boom". for example. But doing this would at best prolong and increase depression where it already ex ists and prolong and increase the consequent unemployment. They merely recommend slowing down the rate.S. Prices and purchases must turn out to be higher than expected. stand that this is what it is doing. Regan. when President Nixon was imposing wage and price con trols. The present American Secretary of the Treasury. is to stop inflating completely. Treasury—led by the Secretary of the Treasury himself The prospect is made even more disturbing when one looks about in vain among the world's statesmen or putative financial leaders for anyone with a clear proposal for bringing the increasing expansion of credit to an end.
and suggested it might start selling off some of this.. 06470) 23 .. the former U. the largest increase proposed in its history.S. Countries are in trouble because they cannot service their current obligations.. A. gold to raise the money to make its intended new loans.net damage than a policy of gradualism. Newtown. 1983. As the Nobel laureate F. end of December.By extending credit to countries beyond their ability to repay.S.9 billion. (P." I cannot vouch for his exact percentage and time-span guesses. Some commentators began pointing out that the IMF was already holding gold at a market value of between $40 and $50 billion. Simon. 1982. the IMF approved an increase in its lending resources of 47. now free to express his per sonal opinion frankly. Conn. Secretary of the Treasury..O.. To resume our history: On Feb. but they il lustrate the kind of alternative involved in the choice. On April 4. wrote in an article in The Wall Street Journal: We are witnessing the tragic spectacle of the deficit-ridden rescuing the bankrupt with an outpouring of more American red ink—and the taxpayer is left holding the bag. The strain on interview in Silver and Gold Report. William E. 12.Box 325.4 per cent to a total of $98. government. Hayek said recently* in recom mending a similar course: "The choices are 20 per cent unemployment for six months or 10 per cent un employment for three years. second only to the holdings of the U.There is no point to a bailout that increases world debt when the problem is too much indebtedness already. the final bankruptcy is worse..
Only a return to a genuine international gold standard (and not a pretence of one accompanied by a multitude of national inflations) can bring lasting world currency stability. When governments are obliged to turn to private lenders. that the system broke down." On May 9.them is not eased by a bailout that loads them up with more." he said. the latter will usually insist on policies by the borrowing governments that will enable the loans to be repaid. uto think in terms of a new Bretton Woods. 1983.by following wasteful and anti-capitalistic policies—policies which the loans themselves then en courage and enable them to continue. President Mitterrand of France called for a conference uat the highest level" to reorganize the world monetary system. On June 8 the Senate approved the bill to increase the IMF's lending resources by a total of $43 billion. uThe time has really come. These loans go mainly to the countries that have got themselves into trouble. among other things to keep the paper franc far above its market level. There has recently been an outbreak of justifiable criticism of private banks for making im provident loans to Third World countries. I may add my own comment that government-togovernment loans made through an international pool reverse all normal incentives." He forgot that it was precisely because under the old Bretton Woods * system American gold reserves were drawn upon and wasted. with 24 . What has been until very recently overlooked is that it is pre cisely because these private banks have been counting on the IMF to bail them out in case of default that a great part of these dubious loans were made.
" But even before the bill was passed.4 billion for the IMF.S.R. in the last day of its session. This was twenty times more than the amount restructured in any previous year. as one might be led to believe by the press. commitment in H. But Congressmen Ron Paul of Texas declared: "The total U. But it attached an irrelevant rider autho rizing $15. in creasing the American contribution to the IMF by $8. 1983. The demand for increased lending by the IMF and other institutions arose in the fall of 1982 because of the huge debts of Mexico. Let us take a look at the international debt situa tion as it stands at the moment of writing this. 18. commercial banks around the world renegotiated repayment terms for $90 billion worth of debt owed by fifteen countries. not merely the $8.4 million.an increase of $8.6 billion for subsidized housing programs. so that the President would be forced to approve this ex penditure also. On Nov. some international bankers were predicting that the additional appropria tion would not be enough. 5. Argentina and other Latin American countries. along with a slue of other legislation. Yet on Sept. 2957 is about $25 billion.S. On August 3 the House passed a similar bill. The New York Times published the following table: 25 . with more restrictive amendments. Congress finally passed a com promise bill. 1983. In the twelve months following.4 billion in the contribution of the U. according to a study by the Group of Thirty. an inter national economic research body.
So long as it stands ready to make more bad loans.3 6.1 24.7 84. 26 . near-bankrupt countries will continue to go into further debt.5 Ecuador Mexico Peru Venezuela 3.7 2.5 86. Banks $8.6 32.3 17.Latin America's Debt In billions of dollars Total Debt Argentina Brazil Debt Owed U.0 $36.S.6 11.2 Chile Colombia 5.9 10.6 2.6 22.4 11.2 Source: Morgan Guaranty Trust Company The world cannot get back to economic sanctity un til the IHF is abolished.
were not the sole causes of the present world inflation. and the International Monetary Fund set up by them." This assumption was disastrously falset We will not stop the growth of world inflation and world socialism until the institutions and policies adopted to promote them have been abolished. and the contin uous making of loans by an international governmental institution—were the proper and neces sary ways to "promote world economic growth. drafted in 1944. But they constituted a major contribution. 27 . They were built on the assumption that inflation—the continuous expansion of international paper credit.The Bretton Woods agreements.
Parti Birth of the Bretton Woods System .
. but the Bretton Woods agreement never seriously considered the return of each signatory nation to the gold standard.Hopes had been raised ten years earlier.
however. 1934 The presence at Basle of Governor Harrison of the New York Federal Reserve Bank is a favorable sign. or the even tual return of both to a fixed gold standard.1 The Return to Gold July 9. Our Government could return to a genuine fixed gold standard acting alone. It is a very equivocal gold currency. The knowledge that that problem was at last being dealt with. that can be changed in value overnight by nearly 15 per cent at the decision of one man. would be extremely heartening. particularly when we learn that he has been confer ring there with Governor Norman of the Bank of England. Whether the two have been discussing the stabilization of the pound and the dollar. will probably remain for the present in the realm of con jecture. however. world We can hardly expect a vigorous and remain subject to fluctuation continued world recovery so long as the two principal currencies and uncertainty. But announcement of such a plan would not have half the immediate buoyant effect on world con fidence that a joint announcement by the two great 31 . The view is sometimes expressed that the United States has already returned to the gold standard.
is a game that no Govern ment is too poor or too weak to play.have. Great increases in export trade have not followed deprecia tion. 32 . The latter would not only restore stability to the two major units of value. it has been learned that competitive depreciation. There is no more a "natural value" for an ir redeemable currency than there is for a promissory note of a person of uncertain intentions to pay an un disclosed sum at an unspecified date. Finally. Again. the usual result of anchorless currencies has been a shrinkage of both export and import trade. One cause for hope of an early agreement is that many of the illusions concerning the advantage of drifting currencies and competitive depreciation have been dissolving under the test of experience. unlike competitive armaments. and that it can lead to nothing but general demoralization.English speaking countries would. but would symbolize a return to international collaboration in a world that has been drifting steadily toward a more and more intense nationalism. the fallacy is beginning to be apparent of the idea that a currency allowed to drift would finally "seek its own natural level/* It is becoming clear that the "natural" level of a currency is precisely what governmental policies in the long run tend to make it.
by keeping its budget in balance. .Instead of putting its emphasis on the need for each country to keep its own currency strong by maintaining convertibil ity'. the Bretton Woods agreement proposed that the strong curren cies should subsidize the weak. It lost sight of the fact that the chief duty of the United States was to maintain the in tegrity of the dollar. trade barriers. and by refraining from inflation. and exchange restrictions.
1944 The United Nations Monetary and Financial Con ference called by the President will meet a month from today. and thereby subsidizing also the in ternal economic policies.For Stable Exchanges June 1. as the purchases continue. however. the nations with strong currencies will be subsidizing the nations with weak currencies (or at least the private holders of those currencies). whatever they may happen to be. The United States. As long.000. of the nations with weak currencies. Its purpose is the highly desirable one of securing stable exchange rates in the post-war world.000.000 Inter national Stabilization Fund misconceives the nature of the problem and approaches it from the wrong end. would be the chief loser. but the money that it poured out in this way might not only fail to help world recovery but. Essentially it seeks to fix the value of each nation's currency unit in relation to the others by ar ranging to have the fund buy the weak currencies and to sell the strong currencies at the parities fixed. as the chief contributor to the fund. by prolonging unsound policies within 35 . It is obvious that a weak currency will drop to its true market value as soon as such purchases cease. But the recent proposal for an $8.
The true solution of this problem would begin at the other end. should be to lay down the principles and explore the methods by which this can be done. if each nation keeps its own monetary unit at par. Thus if a nation's budget is chronically unbalanced it is practically compelled to resort to bor rowing through currency or credit inflation to make up the difference. the pre-war barriers to international trade—tariffs. quotas. The broad principles should not be difficult to for mulate. It would seek to make currencies sound within each country. There will be grave problems after the war for almost every nation fixing a new currency parity at a 36 . Officials of the Government then say that the gold standard "has broken down. if not impossible. When it does this it undermines faith in its currency unit and cannot maintain gold payments. or at least a great reduction in. therefore. might actually do harm." when they really mean that their own policies have broken it. These requirements form a unit. to fulfill the others. Another requirement for a stable currency is a balanced budget. One requirement for a stable currency is that it be redeemable in something that is itself fixed and definite: for all practical purposes this means a return to the historic gold standard. A third requirement is that Governments refrain from cur rency and credit inflation. and all the rest. A fourth is a removal of. If one of them is violated it will be difficult. exchange restric tions. If each nation can main tain the integrity of its own currency. The true object of the forthcoming monetary conference. then the problem of maintaining a stable relationship between different currencies will solve itself.the nations whose currencies could only be held up by such purchases.
They will do it. once said: powers of obtaining gold would only be exhausted when the country had nothing left to sell. one of England's ablest "Our Chancellors of the Exchequer. As Viscount Goschen. It will incidentally help us. however. But the belief that only a rich nation can afford a gold standard is a fallacy." The greatest single contribution the United States could make to world currency stability after the war is to announce its determination to stabilize its own cur- rency. only to the extent that they recognize that they are doing it not primarily as a favor to us but to themselves. if other nations as well return to the gold standard. of course.level where it can be held. 37 .
. This deliber ately sanctioned future world inflation in advance.The agreement provided in advance for a uniform deval uation in the gold value of member currencies.
Experience has shown that it is extremely unlikely that any Government will wish to raise the unit gold value of its currency. of devaluation or inflation that would raise farm prices or wage rates.For World Inflation? June 24. The political pressures from time immemorial. 1944 In the statement of principles for the proposed International Stabilization Fund is this short paragraph: An agreed uniform change may be made in the gold value of member currencies provided every member country having 10 per cent or more of the aggregate quotas approves. or to relieve debtors. There are few countries in which the most vociferous pressure groups are not in favor. or remove unemployment caused by wage rates too high in relation to the existing price level. thereby bringing about an internal drop in prices or wages. particularly the Govern39 . and par ticularly in the last three decades. This is a provision which would permit world infla tion. at almost any time. have been in the direction of devaluation and inflation.
Pensioners would see the purchasing power of their pensions shrink. often bought for purely patriotic reasons. would see the purchasing power of their capital and interest shrink. which will be urged to write down the burden of its internal debt by the device of inflation. When the currency of a single country begins to sag because of inflationary policies. A provision for uniform inflation in all major coun tries would increase the temptation to inflate in each country by removing some immediate penalties. It would be difficult to think of a more serious threat to world stability and full production than the continual prospect of a uniform world inflation to which the politicians of every country would be so easily tempted. 40 . A uniform inflation in the world's most important countries would avoid both of these embarrassments. Holders of Government bonds. One is the immediate loss of gold. unless the Government prohibits its export (which makes the currency sag more).ment itself. many buildings would not be erected and many enterprises would not be started. and. Persons with fixed salaries or wages would see their purchasing power shrink. Capital in the form of bonds or mortgages would be much harder to bor row. two embarrassing results follow. because of the prospect of this inflation. But the real evils of inflation would remain. the other is the humiliation of seeing the country's currency quoted at a discount in other nations. therefore.
No limit was put on the number of these reduc tions of parity provided they were individually 10 per cent or less. No time period was specified for how long in advance such notice was required. After having had its currency accepted at par by other members. 42 . any member country could withdraw from the Fund at any time. and that the proposed International Monetary Fund should not reject such a proposal "Fundamental disequilibrium" was not defined. provided it gave notice in writing.The agreement provided that any country could reduce the par value of its currency whenever this was necessary to correct a (tfundamental disequilibrium".
How Will It Stabilize? June 26." A "fundamental disequilibrium" is not defined in the statement. however. the more difficult it becomes to find exchange stability in it. that when any nation enters the fund a par value for its currency shall be fixed or stated. 1944 One of the ostensible objects of the proposed Inter national Stabilization Fund is "to promote exchange stability. In particular the fund shall not re ject a requested change. A member country may propose a change in the par value of its currency. indeed. but this can apparently be changed at any time. No country that wishes to devaluate should find great difficulty in arguing that it wishes to do so to correct a "fundamental dis equilibrium. for example. if it considers such a change "appropriate to the correction of a fundamental disequilibrium." The more the "statement of principles" for the fund is examined." The statement of principles continues: The fund shall approve a requested change in the par value of a member's currency if it is essential to the correction of a fundamental dis equilibrium. necessary to restore 43 . It provides.
they have no assurance that the value of these currency holdings cies they hold.equilibrium. The statement of principles provides that a member country may reduce the established parity of its cur In other words." The length of the notice is not specified: apparently the member country's withdrawal could take place immediately after the notice was received. Paragraph 1: "A member country may withdraw from the fund by giv ing notice in writing. social or political policies of the country applying for a change. because of the domestic. In other words. devaluation merely because the "fundamental dis equilibrium" complained of has been the direct result of unsound internal policies. will not suddenly shrink through a sudden act of devaluation on the part of the nations whose curren 44 . "In the case of application for a further change. not covered by the above and not ex ceeding 10 per cent. while under the plan the net creditor nations pledge themselves through their con tributions to the fund to buy each net debtor member nation's currency to keep it at parity. the fund shall give its decision within two days of receiving the application. the nations which have been supporting that country's currency cannot reject a rency by 10 per cent." This is a little ambiguous but seems to imply that a nation can devalue a further 10 per cent with the consent of the fund. if the ap plicant so requests. Suppose the nation wishes to devaluate still further? This seems to be provided for under Section VIII.
The one real cure was disregarded: to encourage each country to re frain from inflation and to maintain the integrity of its own monetary unit. This could only weaken the strong currencies. even at its opening. was that the value of the weak currencies should be maintained by the countries with strong currencies agreeing to buy them at a fixed rate. regardless of their market value. .The guiding idea of the conference.
It proposes that each nation shall adopt a par value for its curren cy that the other nations shall accept. of Holland. that the na tions shall put gold or their own paper currencies into a common pool. In several respects the con ference will get off to an unfortunate start. of China. make any but the wildest guess at this moment of the point at which they could hope to stabilize? This problem ex ists on a world-wide scale to a greater extent than ever before in history. it would be impossible to im agine a more difficult time for individual nations to decide at what level they can fix and stabilize their na tional currency unit. and that the resources of that pool 47 . of Greece. Important as the problem of stable exchanges and world monetary soundness is. How could the representatives of France. It is perhaps an even more serious obstacle to suc cess that the main proposal for stabilization the con ference is scheduled to consider quite misconceives the nature of the problem to be solved and therefore attempts to solve it from the wrong end.The Monetary Conference July 1. 1944 Today the representatives of more than forty na tions will gather at Bretton Woods to open a monetary conference.
On the positive side.shall be used to try to keep each currency at par by a control. The United States is in a position to take the leadership. The first essential is a determination to make currencies sound within each country. what could and should be done at the Bretton Woods conference? Much would be gained by an agreement on certain fundamental practicable moment after the war. of a buyer at a fixed price. to keep a valueless keep a worthless stock at $100 a share by buying at that price all of the stock that is offered for sale. But when the allotted resources of the buyer run out. and the buyer will find himself holding just that much worthless paper. principles. just as it is possible to tion with a subsequent collapse. It is obvious that such a plan could maintain even the outward appearance of success only for a short It is possible. of course. It seems probable that the plan could only lead to a printing presses—with the incentive. The plan becomes particularly unrealistic when each nation can turn out unlimited amounts of its own currency on its own not ordinarily have. however. and by announc48 determination to balance its budget at the earliest It could do this by announcing its . huge waste of funds and to a temporary world infla The most important contribution that this country could make to world currency stability would be to declare unequivocally its determination to stabilize its own currency. commitment to buy the weak currencies with the strong currencies. the natural level. over the internal policies of the countries with the weak currencies. The fund is not to exercise any real time. which it does currency or the stock will immediately drop to its currency at any arbitrarily chosen level by a commit ment to pay that price for it.
We could then urge other countries to follow our example. But the United States will hold one great inducement for securing them. not for our benefit. This nation would also have to make clear that it was will ing to take the initiative in lowering its own tariff bar riers. who. and subject to every rumor. the loans should be made by American private investors. but for their own. Even if we adopted such a program only partially it would be of immense help. and solely for stabilization loans. We are in a position to supply it. whether or not other nations were willing to follow. Government participation of this sort might increase both the volume of such loans and the promptness 49 . but firmly anchored to a fixed quantity of gold. either on some such basis as that of FHA mortgages or by the Govern ment taking 5 or 10 per cent of individual loans.ing that the dollar would no longer be on a "twenty-four" hour basis. but not unless they were made would our loans have a reasonable prospect of repayment. The reforms would not only be in the direct interest of the nations making them. We can of fer moderate gold loans in return for such reforms. Most other countries will need help in returning to a sound currency and sound internal policies. But for a limited period of years. through their representatives. would be in a much better position diplomatically to insist on sound policies within the borrowing nation than our own Government would be. and that we for our part would refrain from import quotas and exchange restrictions. So far as possible. there may be an advantage in hav ing Government participation. It is true that the present fashionable fiscal theories stand in the way of such primary reforms.
in short. or when it forbids its own citizens to export gold. Each nation should abandon the fallacious idea that it is to its own advantage to inflate or devaluate. or that it gains when it erects huge tariff barriers or subsidizes exports or blocks its currency. that it gains when it makes economic war on its neighbor. But any machinery that is set up will be of secon dary importance for world recovery compared with ideological reforms.with which they were placed. or credit. Each nation should abandon the fallacious idea. at the same time as the dominant private interest would take the loans out of the dangerous political field and assure that they were made on business principles and with adequate guarantees. 50 . capital.
because this meant not what each one would have to put into the Fund but what it hoped to draw out. This could encourage inflation in such countries and prove very expensive—and wasteful— for the United States.Nearly every nation represented at Bretton Woods sought to increase its "quota" in the Fund. American dollars—to twice the amount of its quota. in the main. . On the basis of this quota it could "buy" currencies of real value—meaning.
The result is a 53 To achieve this international coopera . exchange controls. 1944 Genuine international economic cooperation after the war will be possible only if there is a profound change from the ideology of the Thirties. Nations must learn that their own economic salvation is not to be attained by making economic war upon their neighbors. are the road to economic disaster. The Administration has shown the good-will and the generosity.Results at Bretton Woods July 18.the proposals that the Administration has sponsored at Bretton Woods it has failed to show clarity of thought. blocked currencies. tion will require not only generosity and goodwill on our par but. in. They must learn that prohibitive tariffs. restrictions on capital export. above all. Unfortunately. competitive depreciation. These have reflected themselves in such an indispensable institution as UNRRA [United Nations Relief and Rehabilitation Ad ministration]. clarity of thought. The return of international peace and prosperity will be possible only if these devices are abandoned and if the neomercantilist fallacies that give rise to them are aban doned also. import quotas.
. For the rest it can throw in its own paper money. The delegates at Bretton Woods—above all. valued at an arbitrary figure. with funds and quotas and votes and rules and whereases. On the basis of this quota it can "buy" American dollars—to twice the amount of its quota.plan confused in its objectives and hazardous in its possibilities. a country can borrow many times that amount in dollars or other valuable currencies. whether or not it is convertible into gold or represents anything but the product of the printing press. by putting in a very small quantity in gold. and as if the mere existence of such machinery in itself constituted a solution of the problem. In their determined efforts to secure agreement on the superficial problems of machinery they have failed to secure or even to seek agreement on the really basic problem of principles. apart from that of the United States. In still simpler terms. the American delegates—seem to be obsessed by the idea of machinery. represents fundamentally not what each nation puts into the fund but what it hopes to take out of it. The real assets of the fund will consist of its gold and of make a maximum contribution in gold of only 25 per cent of its quota. The key to the kind of organization they have been setting up can be found in the struggle of nearly every nation to increase its "quota" in the fund. and in many cases the percentage contribution in gold will be far below that. this means that America agrees in 54 currencies of real value—meaning in the main . But each country will "quota". They act as if international economic cooperation could be achieved only by setting up some elaborate organization. In simpler terms. For this whatever currencies are reliably convertible into gold or even into wanted goods.
would supply not only an example but an anchor for other currencies. No loan should be automatic in amount or made without conditions. Through UNRRA we should give to the former occupied countries promptly and generously whatever is needed to relieve hunger and distress. and only on consideration of the adoption of sound internal economic policies in each borrowing country. It should be granted only where there is real prospect of repay ment. and in revealing a determina tion to stabilize the dollar in terms of a fixed quantity of gold. as the strongest financial country in the world. Humanitarian gifts. 55 . in turn. That policy. what is more important. could not in consistency impose condi tions and principles that it was unwilling to adopt first of all for itself.advance to lend each of more than forty other coun tries up to a certain fixed amount of dollars. The greatest contribution that America can make to international cooperation is to take the lead in removing excessive barriers against imports. This not only means that we can lose many dollars in bad loans. in announcing a determination to halt deficit financing and to balance the budget as soon as possible after the war. America. and regardless of the internal economic policies of each country or what it does with the money. but. however. should not be confused with business loans. whether or not there is any reasonable prospect of repayment. that as long as credit is available to nations under these easy condi tions they will postpone unpleasant but essential economic reforms. What is needed above all is an agreement on sound principles.
Because Lord Keynes thought it "worse than a mistake to attempt the invidious task of discriminating between members and assessing their credit worthiness. ." bad bor rowers with bad records and bad internal policies were to get loans from the Fund and the Bank on the same terms as good borrowers with the best records and sound internal policies thus assuring a further loss and waste of scarce world capital.
1944 The drive for a $10. however. Thus the proposed Fund is clearly a lending institution. That is because the Fund quotas at bottom represented potential borrowing. It assumes that nothing will be run well unless Governments run it.000.000. its purpose is to bolster weak currencies by loans of strong currencies.800.000 International Monetary Fund. and serves to il lustrate the real nature of the latter. it rests on the assumption that nothing will be done right unless a grandiose formal intergovernmen tal institution is set up to do it.An International Bank? July 19.000. whereas the Bank subscriptions represent potential lending or 57 . by what ever name it may be called. Like the proposed $8. One institution is to be piled upon another. Nations that were fighting for the largest possible quotas in the Fund are fighting for the smallest possible subscrip tions to the Bank.000 International Bank for Reconstruction and Development illustrates once more the fetish of machinery that possesses the minds of the governmental delegates at Bretton Woods. is the opposite of that found in the formation of the Fund. One of the difficulties being experienced in the for mation of the Bank. even though their functions duplicate each other.
as it would be "worse than a mistake to attempt the invidious task of discriminating between members and assessing their credit-worthiness. It is after the Bank has been set up. with private lenders risking their own funds and borrowers seeking to meet their requirements. Under a free world economy. Lord Keynes has pro posed that the commission to be paid by borrowers should be the same for all members. These conditions hardly seem likely to be filled. is likely to be dissipated in ill-advised enterprises." moreover. however. Under such conditions there is the maximum development of world productivity in pro portion to the capital invested. in general. This brings us to the proposed nature of the Bank itself. that various nations will again seek the maximum amounts. Under such conditions the proportion of bad loans and of defaults seems certain to be high. loans would go to the coun tries and projects that offered the most attractive terms commensurate with the best prospect of repay ment. and the ap plications for loans come in. the implication is that loans themselves are to be made without regard to it. under the proposed international bank plan as envisaged by its framers.losses. that capital would go into the countries providing the soundest conditions and into projects promising the greatest economic success. When the criterion of credit-worthiness is dismissed as "invidious. It would be apparently a bank that "guaranteed" loans made by private investors instead 58 . in a world already faced by grave shortages." This seems to mean that bad bor rowers with bad records and bad internal policies are to pay interest rates no higher than good borrowers with the best records and sound internal policies. and much capital. This means.
of making loans directly itself. is encouraged or forced to follow sound policies in order to attract foreign investors. then the private investors making the loan would not have to exercise any care or discrimination on their own ac count. They would have to conform merely with the requirements of the Bank. convertible or in convertible? Will each nation meet its share of the guarantee merely in its own currency. It is likely. Suppose nation X defaults on its share of the loan. or wholly or mainly in each nation's currency. which would assume all the losses and risks without having the privilege of directly making the loans. to flow from a situation in which each coun try. 59 . Many questions of practical operation also arise. chief borrowers from the Bank. or each industrial venture in it. But if this guarantee fully covered both capital and interest. Who is to guarantee the guarantors? Will the subscriptions to the Bank be in gold. rather. Suppose nation Y then defaults on its share of the guarantee. which may have greatly shrunk in value? World economic revival will not necessarily flow from a plan under which taxpayers are saddled by their own Governments with losses from huge foreign loans made regardless of their soundness. The member Govern ments acting as directors of the Bank would also be the.
." but the specific provisions for the Fund not only permitted but encouraged internal inflation. for example. was "to promote exchange stability. as set up. 1 believed would lead to the opposite of its declared purposes. One of those declared purposes. devaluation and exchange instability.The Monetary Fund.
In view of the instructions of the President to the American delega tion.. A vast machinery is provided which is confused in its objectives. One of the six 61 .." These instructions were unfortunate. In a letter to Secretary Morgenthau. the United States delegation chairman.. this is not surprising. from the proposal submitted before the conference met. They prevented the very discussion ofbasic principles that was most essential. 1944... The result is that the final agreement meets none of the fundamental criticisms that applied to the ten tative agreement.to agree to modifications.provided that such modifica tions do not fundamentally alter the principles set forth in the joint statement.. except in the elaboration of details. and made the conference. Roosevelt wrote: "You and the other delegates will be expected to adhere to the joint state ment of principles of an international monetary fund announced April 21. a rubber stamp which did little more than endorse the previous work of the technicians.8 The Monetary Fund July 24.are authorized . You . in effect. Mr. 1944 The final text of the articles of agreement of the pro posed International Monetary Fund differs very little. on June 9.
" All this implies a return to the foreign exchange restric tions developed in the Thirties. Even after this any nation may "regulate international capital movements. Another declared purpose of the Fund is "the elimination of foreign exchange restrictions." other nations may ration that currency and "impose limitations on the freedom of exchange operations in the scarce currency." But again and again provisions are included to promote instability. but is apparently to last at least three to five years. the Fund cannot criticize internal policies even if they are the direct cause of the devaluation. In other words." But the detailed proposal itself not only permits but encourages and necessitates foreign exchange restric tions. 62 ." It is not allowed to object to a proposed devaluation "because of the domestic. The Fund is not allowed to raise any objection if a nation devalues its currency by 10 per cent. not less." and in some cases will be even requested to do so. during which nations may introduce or continue whatever foreign exchange restrictions they want. And the final agreement retains the provisions to authorize a world wide inflation. It must concur in practically any proposed devaluation if the change is necessary "to correct a fundamental disequilibrium. The "post-war transitional period" is not precisely defined. It must give an answer within three days if the nation wants to devalue a fur ther 10 per cent.declared purposes of the Fund is "to promote ex change stability. If a cur rency becomes "scarce. social or political policies of the member proposing" the devaluation. "The post-war transitional period" is made an exception. It implies a world in which individuals will act under more.
The United States must take the lead in these reforms. Such nations must eschew resort to financing by the printing press. The proposed agreement sets up a huge machinery and ignores all the basic principles which must be adopted if such machinery could hope to be suc cessful The American money poured into support ing weak foreign currencies will be worse than wasted. Only on these condi tions will genuine currency stability. and continuous international cooperation be possible. They must prepare to balance their budgets and make their currency convertible into gold or into a goldconvertible currency at par. freedom of world trade. unless the loans are made conditional upon internal reforms in the borrowing nations. 63 .government coercion and will have less freedom to buy and sell and make payments where they like.
as in the past. This would only lead to failures. but a world in which international prices and trade would be State-dominated. and to dangerous international antagonisms. .What was contemplated in the Bretton Woods agreements and in the 1944 proposed international commodity agreements was not freedom for individuals in different countries to trade with one another on their own terms.
To Make Trade Free
July 27, 1944
The agreements reached at Bretton Woods and the
Administration's plans for international talks looking
to post-war commodity agreements combine to form
a pattern of the kind of post-war economic world that our Government and certainly a number of other
Governments have in view. From the standpoint of traditional freedom of trade the outlook is not an en couraging one. When Adam Smith made his great plea for freedom- of trade in a world strangled by governmental obstacles and prohibitions, the freedom that he had in mind was that of the in dividuals directly concerned. "In every country/' he wrote, "it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest." The freedom of the individual buyer corresponded to the freedom of the individual seller, who likewise, Adam Smith argued,
should be free to sell in the best market and presumably to take payment in the manner that he himself chose in return. But it is certainly not this kind of freedom, the freedom of the individual citizens of each country, that the Bretton Woods agreements or the proposed commodity agreements
have in mind.
On the contrary, these agreements
presuppose a world in which the type of governmen tal controls developed in the Twenties and Thirties are to be expanded and systematized. What is con templated is a world in which international trade is
An interdepartmental committee of technicians is working in Washington on a program for agreements
to "stabilize" the price of international commodities. If the experience of the Twenties and Thirties proved anything, one would have thought that it demonstrated above all not only the futility but the harm of this sort of state "stabilization." Even if we assume that we had a body of the ablest and most disinterested economists controlling the system, they would not be able to fix the "right" price for interna tional commodities. They could not know and weigh properly the thousands of factors that go to form such prices and that determine their fluctuations from day
to day. But, as a matter of fact, the Government ex
perts are not always experts and they are almost never
disinterested. They are usually the servants of pressure groups within their own countries. Almost
invariably, as a result of the demands of their own growers or producers, their idea of "stabilizing" a commodity is to price it too high.
Out of scores of examples we need merely recall what happened in the inter-war period in the case of rubber and cotton. The British rubber producers,
who had almost a world monopoly, restricted exports to force up the price. The first result was intense
resentment in America, the chief consuming country.
But the longer result was that the Dutch and other non-British countries expanded their production of rubber so 'that the scheme ultimately left: the British
rubber growers in a far worse position than if it had never been put into effect. Similarly, the United States kept up the price of cotton artificially before the war by acreage restriction and Government loans. The result was not only that we lost foreign markets and had to put more than a whole year's supply of cotton in storage, but that we encouraged an increase of cotton growing all over the world, thus permanent
ly injuring American cotton growers.
There is reported to be dissent within the in terdepartmental committee of technicians now work
ing on the commodity agreements proposals.
Representatives of the Department of Agriculture are represented as desiring permanent instead of merely temporary international commodity agreements,
while other experts hold that such agreements fixing prices and production on world markets would be in
consistent with our governmental opposition to
cartels. This is perfectly true. And in addition to this
inconsistency we must remember that the nations
that are the chief consumers of the raw materials will
resent the fixing of prices above the natural market and that such economic disagreements will lead to dangerous political antagonisms. There is a grave danger that the phrase "interna tional cooperation" may be perverted to mean the drawing up of agreements between Governments to control at every point the economic transactions of their own citizens. In the economic field, on the contrary, true international cooperation means the termination of such governmental controls, which are invariably conducted in the interests of political pressure groups, and the return to a world in which men are free to trade and produce at the prices fixed by supply and demand and competitive efficiency.
His objections to the Bretton Woods pro posals—that their net effect would be for the good curren cies to "be pulled down to the level of the poor currencies}}—merited particular attention.The plan put forward by Winthrop W. Chair man of the Board of the Chase National Ban/c. Aldrich. deserved serious study. .
suggests as a substitute for the plans advanced at the Bretton Woods conference the negotiation of international agreements for the removal of trade barriers and the establishment of a stable dollar-sterling exchange rate. Aldrich points out that under the instructions from the President both the American delegation at Bretton Woods and the delegations of other countries were committed to a particular monetary plan in advance and were not free to work anew on the problem or to consider an alternative approach. 1944 Winthrop W.10 Mr. will be called upon to supply "about 70 per cent" of the real lendable assets of the Fund." The United States. by far the largest contributor. Whatever may be the final verdict upon the merits of his proposal. Aldrich. The powers of the Fund "seem to be obscure and uncertain/' Its objectives "lack the focus essential to its success. 69 . Aldrich's Monetary Plan September 19. his analysis of the proposed International Fund and Bank is thoughtful and impressive. Mr. "Inasmuch as the Fund gives nations with relatively poor currencies access. Chairman of the Board of the Chase National Bank. and his own positive proposals make it obvious that his viewpoint is far from that of an economic nationalist.
If the proposed conference proved successful in achieving a joint agreement to shun totalitarian tac tics in international trade and to adopt economic liberalism. imperial preference. The sum needed may be a large one—but the problem is large and we must show courage in its solution. 70 "The prerequisites are internal . export subsidies. bulk-purchasing and regional currency arrangements. the good currencies may be pulled down to the level of the poor currencies. Mr." Once the dollar-pound rate is stabilized. would be to increase rather than reduce exchange controls.on an automatic basis. the United Kingdom and other members of the British Commonwealth enter into immediate conversations on such problems as tariff barriers. the United States should offer to provide England "with a grant-in-aid sufficiently large to establish stability between the dollar and the pound." He proposes that the United States. "The all-important economic problem of the post-war world is the removal of trade barriers. Aldrich cites the many liberal provisions for alteratiofis in exchange rates." Mr. to relatively good currencies. Aldrich concludes that there is no sound function it could undertake which could not be done better by our own existing Export-Import Bank. indeed." The effect of the Fund provisions. Aldrich then comes to his alternative proposal. since the plan attacks the symptoms rather than the basic causes of exchange instability." Proposals for exchange depreciation. and fears that under them "exchange deprecia tion would undoubtedly become an accepted and normal procedure in international financial affairs. Mr. After an examination of the proposed international Bank. "would be inevitable. attention should be directed immediately to the stabilization of other currencies. he fears also.
a reasonable measure of economic well-being and the absence of inflation. either. There would clearly be some embarrassment in set ting aside now the plans agreed to at Bretton Woods." Implicit in all this. for it will involve the repeal of some unsound monetary legislation still on the books. and it will involve ultimately a balanced Federal budget. It is by no means certain. Aldrich believes they have. But he has put forward a carefully reasoned argument and a constructive proposal that deserve serious openminded study. This. a constructive solution of the pro blem of trade barriers. 71 . will not be easy. Mr. Aldrich concludes. as he shows. is our responsibility to make our own currency in the post war period one in which other nations can have confidence.political stability. that an Anglo-American agreement of the type he recommends could be brought about. even if they have the defects and dangers that Mr.
Prof John H. that there would be "a general retention of the machinery of exchange con trol not only for the transition period but permanently. He found it to be an "unstated assumption of the Fund". but adopt the proposed Bank with modifications." . suggested that Congress postpone any decision on the proposed Fund. in an article in Foreign Affairs. Williams of Harvard and vice-president of the Federal Reserve Bank of New York. among others.
whatever 73 . find better ones. Williams begins by pointing out that Congress Our action on them will be taken as an omen of things to come. 1944 In the current issue of Foreign Affairs. faces a difficult dilemma. Williams. who was a critic of the proposed International Monetary Fund in its formative stages. now. we must "But it will not seem constructive to insist in 1945 upon some wholly new approach and to start the whole process of international negotiation over again. He recommends that Congress postpone any decision on the Fund at present. returns to a criticism of that proposal in the form adopted at Bretton Woods. John H. Professor of Economics at Harvard and vice president of the Federal Reserve Bank of New York. If the plans are defective.11 International Money Plans October 1. but makes the interesting compromise proposal that the proposed International Bank should be adopted and its func tions expanded to achieve some of the ends that the Fund was intended to achieve. Mr. The realistic and helpful approach. The monetary plans framed at Bretton Woods will present one of a series of major decisions about post-war international arrangements.
to adopt the Bank with modifications and to withhold for the present a decision on the Fund. "It would not." This would mean a general system of foreign exchange "reporting and policing. He points out that the Fund is intended. he holds. On the other hand. in looking for a compromise solution. in . It would supply funds "indiscriminately to all the United Na tions and would make them available on a time schedule and as a matter of automatic right. distribute foreign exchange resources indiscriminately to the many countries that do not need them as well as to those 74 desired from the Fund. Williams has become "increasingly interested since Bretton Woods in what might be ac complished through the Bank. But there are no provisions for applying corrective measures to the wrong policies of debtor nations. Williams suggests that it would be wise to separate the proposed Fund from the proposed Bank. in any case. to exchange and trade discrimination." For the transition period. Mr." He particular. a solution can be found. as the leading creditor na tion. like the Fund.machinery of exchange control not only for the tran sition period but permanently. is to see whether out of these plans." This has led him to "wish to explore the possibilities of extending the Bank's functions to include some part of what is finds it to be uan unstated assumption" of the Fund that there will be ua general retention of the one's earlier preference may have been." Mr. primarily as a long-run agency of monetary regulation and is unsuited to handle the transitional problems that will chiefly exist in the next few years." The provisions for declaring a currency scarce and for rationing its supply would subject the United States. he thinks it could be the better instru ment.
It would operate selectively. the dollar and the pound. both as to place and to time. the solution of monetary stabilization. When this has been disposed of. he thinks. Williams suggests that in addition to its present in tended'functions there might be added to the Bank an exchange stabilization loan department. with respect to each other. "It would require a much smaller sum and at the same time pro bably be much more flexible and effective than the proposed Monetary Fund. 75 .000 accumulation of sterling war balances in London.000. must be found through the "key currencies" principle. and must be built upon the stabilization of the two key currencies. the central post-war interna tional economic problem will be the solution of England's special difficulties created by the $12." Meanwhile.000." Mr. he is con vinced.that do. and with discrimination.
. the countries of Europe were trying to solve their immediate currency problems individually.While the Bretton Woods talks were going on. But Belgium. for exam* pie. was planning the unnecessary and dangerous course of deflation by reducing its outstanding note circulation by 30 or 40 per cent and freezing people's bank balances. without undoing the harm of past inflation. Defla tion merely brings injustices and other evils of its own.
The other liberated countries of Europe are watching this experiment anxiously. that are the more difficult to solve. the proposed International Monetary Fund is planned as "a permanent institution" and is not designed to solve the currency problems of the transitional period from war to peace. Many of the details of the Belgian plan have not been made clear in the cables. 1944 A dispatch from London to this newspaper declares that the question of the merits or demerits of the Bretton Woods world currency stabilization agreement has been pushed aside as academic in Great Britain by the more immediate and acute currency problems that threaten the liberated countries of Europe. and by freezing people's present bank 77 . however. It is precisely these problems. It aims to reverse part of the inflationary process by deflation. by reduc ing the outstanding note circulation by some 30 or 40 per cent. This calls attention once more to the fact that.12 Europe's Monetary Maze October 27. but the plan in its broader outlines does not appear to be well-conceived. contrary to common belief. The boldest attempt to bring order out of chaos in the domestic currency situation has been made in Belgium.
then the commodities whose prices are fixed will either not be produced and sold. This means refusal to put out further issues of paper money. is to try merely to prevent the process from going further. which is less than two weeks old. The process is politically unpopular. once inflation has been allowed to occur. but it rarely involves recalling (except in exchange tling of production. One of these is the system of price fixing. balances so that they can spend only a small part of But once inflation has done its harm. If profit margins for producing necessities are non-existent or below the levels for producing other goods. in unemployment. it is impossi ble to try to undo this harm by the reverse policy of deflation. When prices of necessities are fixed below the levels to which the free play of supply and demand would bring them. The safest policy for a Government to follow.them. or the Government will have to subsidize the pro ducers to make sure that they are produced and sold. one of two results must follow. so much so that our London dispatch declares that the Belgian deflationary program. by fixing a new value for the currency calculated to stabilize prices and wages at their new level. already threatens the over economic stagnation. Its most dangerous aspect is outstanding. in a throt The currency problems of liberated Europe are complicated by many other factors. for new currency) part of the paper money already throw of her present Government. In the first case shortages will be intensified in precise78 . The deflation merely brings a new series of that by trying to force down prices and wages from the levels they have reached. it may result in injustices and difficulties.
On humanitarian grounds and on grounds of friendliness. It has raised the prices paid to farmers for cattle and milk while leaving fixed retail milk and meat prices unchanged—which means that it must supply the dif ference by subsidies. They know. the Red Cross and UNRRA will be great in any case. pay them. 79 . The Belgian Government is sending convoys of trucks around the country to try to gather in the farm products that have not come to market. even on selfish grounds. We do not want to see it intensified by mistaken governmen tal policies in Europe that would reduce what the peo ple of these countries would otherwise be able to pro duce for themselves. In the second case the burden on the Treasury will be greater. The problem of transporting and distributing American food to Europe through the Army. the budget will be thrown further out of balance by the subsidies. and more note issues. Americans are eager to see the newly liberated countries of Europe solve their difficult economic problems as well and as quickly as possible.ly the goods of which it is necessary to have fullest production. But they have an even more im mediate and direct interest in the policies followed by the newly liberated countries of Europe at this time. that is to say. will be used to Belgium today seems to be facing both conse quences. that a prosperous post-war America requires a prosperous post-war Europe. more inflation.
It pointed out. the proposed International Bank. and did not even stipulate that its loans should be sound loans. The American Bankers Association published a carefully reasoned and conciliatory report recommending that Congress should not approve the proposed Interna tional Monetary Fund but onlyy with modifications. among other objections.automatically as a matter of right. that the Fund agreement granted credit .
the American Bankers Association has published a report in which it contends that congress should not ap prove the proposed International Monetary Fund.13 Bankers on Bretton Woods February 5. The language of the agreement is so vague as to be 81 . The Fund is too big. and conciliatory in tone. The bankers recommend also an expansion of the American Government's ExportImport Bank. too com plicated. too elaborate. The rejection of the proposed Fund is based on reasons that for the most part have already become familiar. too difficult for the public to understand. 1945 After careful studies by several committees. the repeal of the Johnson act. with modifications. and "the firm stabilization of the United States dollar in relation to gold. It is clear that the authors have made every compromise that they thought could safely be made so that the proposed program might be considered with a minimum of essential changes. but that it should approve. the removal of hampering barriers to international trade. lucidly written." The Association's report is well reasoned. the proposed International Bank for Reconstruction and Development.
that they must be examined by a special committee. moreover. It overlooks the fact that the outside world as a whole already has more gold and dollar exchange than ever before. that if the proposed International Bank for Reconstruction and Develop ment were adopted by Congress. If the Bank were adopted. the world would avoid the danger of jurisdictional conflicts and poten tial confusion and rivalry between two separate in82 . and authorized also to make loans for the purpose of aiding countries to stabilize their currencies. that our own gold stock has been going down. when we susceptible to widely different interpretations. For the Bank agreement provides that the loans made must be for specific purposes. however. as a matter of right. It threatens a repetition on a large scale of the errors we made after the First World War. It may tempt borrowing countries to con tinue on the easy political path. The bankers believe. and that we are about to be forced to lower our legal reserve re quirements. it would accomplish every good purpose that the Fund would accomplish without its accompanying dangers. or countries whose trade policies discriminated against us. that they must offer promise of repayment. It would force us to supply dollars even to countries with which we might be having serious political differences. lent too much and too carelessly. It provides no real control over the policies of borrowers. that the country whose currency is lent will have a veto power and that the Bank will not make loans which can be reasonably made through private channels. instead of making the maximum effort to put their economic affairs in order.It It does not stipulate that the loans shall be good loans. grants credit automatically. and the Fund rejected.
It is to be hoped that not only Congress but the Administration itself will study the report in the same spirit. in a constructive and statesmanlike report.stitutions. 83 . The American Bankers Association committees have brought. Acceptance of the Bank would also avert the psychological danger to world cooperation of a total rejection of the Bretton Woods proposals.
The Administration seemed to be following slavishly the decisions of Lord Keynes and Harry Dexter White. Secretary Hans Morgenthau told a news conference that if the advice of the American Bankers Association were followed the chances were that it would kill the whole Bretton Woods Monetary Agreement. . That implied that Treasury officials would take an all-or-nothing attitude before Congress regarding those agreements.
can be better secured through the Bank. the attempt is made to tie it indissolubly to the proposed International Bank. also. for the desirable objectives of the Fund. For if. if any attempt were made to dismiss the position of the American Bankers 85 . Such an outcome would be doubly unfortunate.14 The Fund and the Bank February 7. 1945 Secretary Morgenthau is reported to have told a news conference that if the advice in the recent report of the American Bankers Association were followed. he added. the result may merely be that the proposed Bank itself will be rejected along with the proposed Fund." These comments imply that Treasury officials will take an all-or-nothing attitude before Congress regarding the Bretton Woods Agreements. It would be regrettable. whether this position will be wise. Certainly each proposal should be considered on its own merits. in view of the serious objections to the pro posed International Monetary Fund." He hopes. without its dangers. in order to save the Fund. It may be doubted. "the chances are it would kill the whole Bretton Woods Monetary Agreement. that in the final analysis bankers will see "just a little further than their own immediate business.
and every sincere criticism of it. 86 .Association on the ground that it reflected merely the selfish interests of bankers as such. The authors of this report are entitled to be credited with the same public spirit that animated the Treasury officials who helped to frame the Bretton Woods plan. ought to receive. The at tribution of selfish or narrow personal motives would tend to lower the whole tone of debate and to prevent the objective consideration that the Bretton Woods plan.
Secretary Morgenthau then declared: "It has been proved.. We propose to do this if and when the legislative bodies approve Bretton Woods. though one of the clearly stated objectives of the Fund in its official text is "the elimination of foreignexchange restrictionsyf> President Roosevelt's Treasury Secretary announced his determination not only to impose such restrictionSy but to allow no one to import or export or to draw funds to travel abroad without the government's consent." Thus. .that people in the international banking business cannot run successfully foreign exchange markets.. It is up to the Governments to do it.
Such an 89 . It is up to the Governments to do it." Such a comment is not likely to be helpful to the For those agreements Bretton Woods agreements. This means that no one would be allowed to make a single import or export. indeed. or to use his dollars to make a trip abroad. without the Government's consent. 1945 An Associated Press report attributes to Secretary Morgenthau an interesting comment on the American Bankers Association report on the Bretton Woods agreements. that people in the international bank ing business cannot run successfully foreign-exchange markets. One of the stated objectives of the Fund in its official text." But if Secretary Morgenthau is correctly quoted. he now tells us not only that Governments are going to restrict the foreign-exchange markets. have hitherto been represented as part of an effort to free the post-war foreign-exchange market from arbitrary governmental controls. We propose to do this if and when the legislative bodies approve Bretton Woods. as far as I am concerned. "It has been proved. is "the elimination of foreign-exchange restrictions.15 Freedom of Exchange February 10. but under the agreements are going to run them entirely.
90 .argument is hardly likely to appeal to believers in a freer world trade.
But John Maynard Keynes (the leading author of the Bretton Woods agreements) ignored the necessary qualifications to the classical doctrine. in fact. supply and de mand are not merely equal but identical since every commodity may be looked upon either as supply of its own kind or as demand for other things. inflation. He was confused by the existence of triangular exchange through the medium of money. This logically led to recommendations of continuous additions to the supply of money—in other words.Supply creates demand. and at tributed every slackening of business to a shortage of "pur chasing power}) as measured in money. In the aggregate. Real purchasing power grows out of production. The classical economists recognized this basic truth. This Keynesian ideology permeated the Bretton Woods agreements. .
It is assumed that "purchasing power" must be kept above "production" if the latter is to expand. The great producing countries are the great consuming countries. Sup ply of wheat gives rise to demand for automobiles. The twentieth-century world consumes vastly more than the eighteenthcentury world because it produces vastly more. and other things that the 93 .16 Supply Creates Demand February 11. Economists have long recognized the real truth of the matter. This is that purchasing power grows out of production. shoes. 1945 One of the fallacies that have given rise to the belief that we can be saved from disaster after the war only by a continuation of huge Government spending and deficit financing is the assumption that "production" and "purchasing power" are two entirely different things. "purchasing power" as money. cotton goods. "Production" is thought of as goods. Those who believe this are finally led to the crude inflationary theory that we can keep going after the war only by the process of constantly increasing money payments regardless of production—which means constantly expanding bank credit or issuing more money from the printing presses. radios.
In recent years this basic truth has been challenged by Lord Keynes among others. It assumes that the proportions among various goods and services must be right. Benjamin M. It assumes the absence of paralyzing governmental in terference with the markets. As Dr. Supply of shoes gives rise to demand for wheat. published in 1936. the price relationships. but rather to have taken advantage of an error of illustration (promptly rectified) in John Stuart Mill's statement of it. among different commodities must be right. But Lord Keynes does not appear to have dealt with the essentials of the doctrine. and does not change. But these necessary qualifications do not change the central truth of the doctrine. for identical. In the modern world all this happens not by direct barter but by indirect exchange through the medium of money. In the ag gregate. This is pointed out in a reply to Keynes' criticism by Prof. It assumes a condition of equilibrium. for motion pictures. Anderson in The Commercial and Finan cial Chronicle. the doctrine that supply creates its own demand assumes certain conditions. We can get post-war prosperity and full production when free enterprise and free markets are allowed to bring about the 94 . the essential process. Anderson concedes. and for other things that the shoe pro ducer wants. Interest and Money. supply and demand are not merely equal but wheat producer wants. since every commodity may be looked upon either as supply of its own kind or as demand for other things. This merely complicates. that the terms of exchange.automobiles. notably in his General Theory of Employment. It assumes the existence of free competition and free markets to bring about these proportions and price relations..
pouring more We do not have to keep money into the spending stream through endless Government deficits. but the way to uncontrolled inflation.conditions of equilibrium. That is not the way to sound prosperity. 95 .
M31 Times edi torial suggested acceptance of the proposed International Bank (with the specific power to make exchangestabilization loans) but at least postponement of any Con gressional acceptance of the Fund.President Roosevelt's message to Congress recommended adoption of the Bretton Woods agreements. .
It will make it possible for nations to borrow in the near future when their need for loans will be most urgent. deserves serious consideration. If the Bank proposal were adopted and this amend ment made. Congress could withhold for the present 97 . And it will indicate to the world that the present Congress is ready to consider every proposal for international cooperation with an open mind and in a non-partisan spirit. 1945 The President's message to Congress on the Bretton Woods money and banking proposals is conciliatory and statesmanlike in tone. he also discusses the two proposals separately. Though he recommends that Congress promptly adopt the plan both for the proposed international Bank and the proposed inter national Fund. and each on its own merits. At least one amendment to the Bank proposal. Congress should accept the proposal for the pro posed international Bank as promptly as it can do so consistent with careful study. however. This would specifically permit the Bank to make loans for currency stabilization pur poses as well as for the purposes already outlined in the text of the existing Articles of Agreement.17 Bretton Woods Proposals February 13. Such action will insure two good results.
The President asks for repeal of the Johnson Act. The text of the Fund Agreement itself seems to contemplate that this period of transitional arrangements will last at least five years.any decision on the Fund. The act has done no good and much harm. The Fund is open to objec tions of a serious nature. it becomes clear upon further study that the Fund is in tended primarily as a long-run agency for monetary management. some of which have already been discussed in these columns. the sooner we will be rid of a pre-war gesture that does us no honor. It is not adapted for dealing with some of the most serious problems in the transition period ahead. Moreover. Once we ac cepted an international Bank authorized to make currency-stabilization loans. This could be done promptly by Congress by a resolu tion of a few lines. the case for postponing action on the Fund would be even stronger. 98 . therefore. The sooner it is repealed. The act attempts to prevent American citizens even from lending their own funds at their own risk to some of our present allies.
action on the proposed Fund should be postponed. . the American dollar should be maintained at a fixed value in terms of gold.The New York State Bankers Association published a sixty-two page report on the Bretton Woods proposals^ coming to substantially the same conclusions as the earlier report of the American Bankers Association: the proposed International Bank should be accepted with certain minor changes.
Another doubt as to the feasibility of the Fund arises from the lack of agreement on the inter101 . but that action on the pro posed International Fund should be postponed. and comes to substan tially the same conclusions as the recent report of the American Bankers Association. It is an important analysis. 1945 The New York State Bankers Association publishes today a sixty-two-page report on the Bretton Woods proposals prepared by its committee on international monetary matters. It holds that the pro posed International Bank should be accepted with certain minor changes.18 More on Bretton Woods February 15. The New York State Bankers conclude that the Fund is not a suitable instrumentality for dealing with the tasks that lie immediately ahead. impressively argued. They regard its system of credits based upon quotas as unrealistic and impractical. American readiness to cooperate with Britain on the latter*s financial problems. It also urges repeal of the Johnson Act. a group consisting of the heads of half a dozen of the leading New York City banks and of several up-State institutions. and reduction of obstacles to international trade.
On the contrary.pretation of its provisions. could accomplish nearly all the desired objectives of the proposed Fund without the latter's dangers. The New York State Bankers point out that the proposed Inter national Bank. we believe the Fund would tend to perpetuate exchange controls and other restrictions on the free move ment of trade. The greatest single contribution that the United States can make to world stability is to maintain the integrity of the American dollar. conclusions follow: Some of their broader The immediate task is to restore political and economic order to the world. with some additional authority. The adoption of a trade policy greatly reducing restrictions on United States imports would also contribute to world stability. The establishment of the Fund prior to the restoration of favorable underlying condi tions would not result in the achievement of economic stability or the elimination of ex change controls. International peace and security. and the removal of international trade barriers are the basic problems that demand attention. This can be done only by the maintenance of the fixed value of the dollar in terms of gold and the attainment as soon as practicable of a sound na tional budget and other sound internal policies. internal stability in each country. These conclusions emerge from a careful report the whole text of which merits serious study. 102 .
Private bankers and technical experts were opposed to the provisions of the proposed International Fund because they were convinced that t(the divergence of conditions in the various countries is so great that the stabilization of each currency must be treated as an individual problem'" and not by a uformula that can be applied to all cases." .
including those of the American Bankers Association and other bodies representing the bankers of the country.19 The Bretton Woods Bill February 17. . But they have put forward strong reasons for at least postpon ing until a later time action on the proposed Interna tional Fund. Special provisions added by the bill will need to be ex amined in addition to those of the Bretton Woods agreements themselves. have urged that the pro posed International Bank be adopted as a helpful in strument in world economic cooperation. The main question to be asked now is whether. As the New York State Bankers Association committee remarked this week in con nection with the Fund: We are convinced that the divergence of con ditions in the various countries is so great that 105 merits. under the bill as drawn. 1945 It is to be hoped that the bill on the Bretton Woods agreements now introduced in Congress will be con sidered in an open-minded and nonpartisan spirit. Congress will be free to consider particular provisions of the Bretton Woods agreements on their individual Technical experts.
think it is possible to develop a workable formula that can be applied to all cases. As a group. 106 . bankers want to see as high a volume as possible of international trade. The cause of international cooperation would itself only be hurt in the long run if unwise measures which would work out badly are adopted along with necessary measures which have a high prospect of success. Too much depends upon the will and the efforts of the individual country for the over-all approach to achieve the success anticipated by the authors of the Monetary Plan. They want stable exchanges so that they and their business customers can grant international credits and conduct other international transactions with reasonable security. The judgment of these bankers ought certainly not be rejected out of hand.the stabilization of each currency must be We do not treated as an individual problem.
a gold standard".. . leader of the British delegation at Bretton Woodsy had declared before the House of Lords that t(this Bretton Woods plan is the exact opposite of.There were still major obscurities surrounding the Monetary Fund agreement. Many Americans still believe that the agreement took us back along the road to a gold standard and currency stability} but Lord Keynes. The Roosevelt Administration should have withdrawn the Fund proposal until these ambiguities had been cleared up. and that it would permit both "flexible" and discriminatory exchange-rates..
20 Money Plan Obscurities March 15. referring to the Bretton Woods agreements. Boothby pointed to what he called certain "major obscurities" in the Bretton Woods Monetary Fund agreement. 109 . In both letters Mr. which it published on March 4. 1945 This newspaper received a letter from Robert Boothby. currency stability. and he pointed out that regarding several of them precisely the op posite interpretations had been made in Great Britain from those generally made here: You have been led to believe that the Bretton Woods proposals take us all back along the road to a gold standard. Boothby is a Member of Parliament and chairman of the Monetary Policy Committee in London. which it published on March 14. that exchange rates will be flexible and that reciprocal trade agreements involving discrimination will be per missible. nondiscrimination and multilateral trade. We have been assured that they constitute the exact reverse of a gold standard. Mr. and a sec ond letter.
Wholly apart from Mr. a view that has been disputed in the United States. he is correct when he writes that "Nothing could be more deleterious to the future of AngloAmerican relations than that the two countries should sign an agreement." It is Lord Keynes. who declared before the House of Lords: "If I have any authority to pronounce on what is and what is not the essence and meaning of a gold stan dard. or whether the Fund has a right to withhold credit because of such policies. each thinking that it means something quite different. Boothby's con- tentions before the House Banking and Currency Committee. discussing Mr. Boothby's motives and his purpose in being in this country at this time. Widely different interpretations have been made of the Fund agreement here and in London.Treasury spokesmen. Boothby alleges to be in the Bretton Woods agreement in fact exist? There can be not the slightest doubt that they do. in short. do not appear to have dealt with them very satisfactorily." It simply does not make sense for the United States. Do the obscurities and ambiguities which Mr. who in a letter to The Times of London contended that the Bretton Woods plans would still permit Britain to make purely regional trade and currency arrangements. I should say that this plan is the exact opposite of it. regardless of unsound currency or other economic policies in the borrowing countries. Such personal considerations do not meet the real issue. Boothby's personal motives. It was Lord Keynes. Great Britain or 110 . They questioned Mr. There has developed in addition a vital difference of opinion concerning whether the credit granted by the Fund is automatic. which is. leader of the British delegation at Bretton Woods. also.
did not sign any formal document of monetary cooperation with other nations. "Gold and the Gold Standard. Kemmerer's book. it had to keep its budget in reasonable balance and see to it that an infla tionary expansion of bank credit did not take place within its borders. A nation that formerly adhered to the interna tional gold standard. Edwin W. Yet a strange situation has arisen in recent months.any other country to commit itself to the Bretton Woods Fund agreement without knowing precisely what it has committed itself to. who try to arrogate to themselves alone* the title of "internationalists. It is some of the very people who are insisting on the Bretton Woods Fund Agreement. many of them precisely because they believe that it will permit the continuance of managed inconvertible paper money systems. To make sure that its promise of convertibility would be kept." This strange paradox is brought out in a review in the current Political Science Quarterly of Prof. it is true. It had to allow freedom of gold ex111 . To do this it had to make its curren cy convertible on demand into a definite and fixed quantity of gold. the most international standard is gold. A nation that wished to stay on the gold standard had to keep its own currency stable in terms of gold. on the other hand. but the cooperation was none the less real and thoroughgoing. precisely because they fear that it really is "the exact opposite" of the gold standard—who are today being de nounced in some quarters as "isolationists" and enemies of international cooperation." As Professor Kemmerer points out. while the most national is paper or some other non-gold currency. It is the bankers and others who are critical of the Bretton Woods Fund Agreement—in part.
To make sure that this did not drain it of gold. 112 . An agreement so arrived at could be submitted to other nations for comments or suggestions. would be for the Administration to withdraw the Fund proposal at this time. It could not take its economy so far out of line with the world economy as to cut off its exports and take in too great an excess of imports. and then to attempt to reach an agreement with the British on the important points at present subject to such divergent interpretations.port. however. it had to maintain a two-sided trade balance. There are several ways in which the problem might be dealt with. without this essential clarification. A much better course in every respect. This would be a far wiser course than the Administration will pursue if it insists that Congress adopt the present Fund agreement blindly. Congress might accept the Fund subject to an explicit set of understandings or inter pretations on essential points at present left in obscurity. to ask Con gress to adopt now only the much less controversial Bank proposal.
" . when it prevailed. incredibly. Through it the value of each nation's currency was tied in with all the rest. represented the closest form of international economic and monetary cooperation that the modern world has ever achieved. the advocates of continued nationally-managed inconvert ible paper money systems called themselves the only true believers in liinternational cooperation.The international gold standard. Yet at this point.
in a topsy-turvy argument. Through it. represented the closest form of international economic and monetary cooperation that the modern world has ever achieved. Now the international gold standard. likewise. it is the bankers who are being denounced. Through it the value of each nation's currency was tied in with that of all the rest. Nationalism March 17. It is no accident that the literature of nazism is so full of denunciations of the gold standard and of "international bankers. each nation's economy was tied in with that of the rest of the world. when it was in its fullest operation in the early part of the present century. It is precisely because the gold standard did have these international implications that nationalists. and the advocates of domestic managed economies and of autarchy. were so opposed to it. is "the exact opposite" of the gold standard." But now.21 Gold vs. 1945 The monetary plan embodied in the Bretton Woods agreements. Lord Keynes assured the House of Lords. not as internationalists but as "isolationists. while the 115 ." because they prefer a restoration of the international gold standard to a system under which each nation individually would be free to follow whatever unsound policies it wished.
116 .nations collectively would have to bail it out of the difficulties into which it fell as a consequence.
In an inconsistent report that read like a compromise ar rived at in order to obtain agreements among all fourteen memberSy the Committee for Economic Development} a group of businessmen. and to do it without having the power even to lay down conditions for such loans. The CED recom mended that powers to make long and short-term stabiliza tion loans be made merely discretionary and turned over to the proposed International Bank. even after it had thus been made unnecessary. pointed out the dangers of putting the Fund (as then planned) under pressure to make longterm loans. . to do it whether or not these loans were likely to be repaid. But the CED inconsis tently recommended that the Fund be retained.
This statement reads like a compromise arrived at in order to obtain agree ment from all fourteen members of the committee. It suggests. to do it whether these loans are likely to be repaid or not." It fears that great pressure will be put upon the management of the Fund to make what will be in effect long-term loans. 1945 The research committee of the group of outstand ing business men known as the Committee for Economic Development has published a statement on the Bretton Woods proposals. that establish ment of the Fund be postponed unless the Interna119 . ubut from the very serious distortions in production and inter national trade relations caused by the war. and to do it without having the power even to lay down the conditions under which the loans are made.22 The CED on Bretton Woods March 25. that as the agreements stand at present the principal demands upon the International Monetary Fund will come. As often happen with such compromises. quite properly. The committee fears. therefore. the position taken lacks clarity and embodies some inner con tradictions. not from temporary imbalances of trade.
the committee argues. that a nation having access to the resources of the Fund should put and keep its own financial house in order—that it should. the managers of the Fund would be relieved of this pressure." If the Bank were granted this power. The committee is right in wishing to give the Bank this power to make stabilization loans. The first requirement of any International Monetary Fund. for example.tional Bank is given the express power. refrain from discriminatory trade practices. pointed out that if the proposed International Bank were granted this power. once the International Bank has been granted this new power. whenever they think it necessary. the Fund would then become un necessary. which it does not have at present. They should be able to insist. or the im position of unreasonable barriers on trade. that it stop an inflationary expansion of bank credit or the 120 . par ticularly as it is now drawn up. The American Bankers Association also made this recom mendation. if it is to be adopted. The managers of the Fund should retain the right of discretion at all times. It is difficult to understand why the CED committee recommends retaining the Fund. and it is not drawn up to perform its proposed functions well. because they could then "refer to the Bank those transactions for which the Fund is not intend ed. is that it should be drawn up on the same basic principle as the pro posed International Bank. There would be no important function left for the Fund to per form. But the ABA report. to make "loans for long-term and short-term stabilization purposes. as well as that of the New York State Bankers Association." and the Bank would be able to require a country to correct unsound policies in return for the loan.
or take steps to balance its budget. it should not mask behind the facade of a loan.misunderstandings and bitterness between countries. currency transactions should be currency transactions. If a gift cannot be made as a gift. 121 . But if the proposed International Bank is granted the power to make discretionary long-term or short-term stabilization loans. and gifts should be gifts. as the CED committee recommends. and it will never accomplish the objects that its advocates hope for from it.printing of paper money." On this prin ciple alone the Fund as it is at present drawn is unsatisfactory. its resources will be dissipated to no purpose or to harm ful purposes. the Fund will not be necessary.. Unless the Fund has the clear authority to insist upon such conditions in return for its loans. The CED committee itself lays it down as one of "five basic principles" that "loans should be truly loans.. Lack of clarity as between intent and method at this point will pro duce.
.The small block of "silver Senators'' tried to get the Bretton Woods agreements to include uworld recognition of silver as a monetary metal." Had they succeeded they would have postponed even further any return to an inter national gold standard-the one step that would have restored stable exchanges and end the chaos of nationally "managed" currencies.
23 Silver Boys in Bretton Woods April 7. Now some of the silver Senators are turning their attention toward the Bretton Woods agreements. the policy did great harm to the economy of China. For the country as a whole it accounts for less than onetwentieth of 1 per cent of the national income. The result has been an inexcusable waste of the public funds. Silver production is a very minor source of the income even of these states. Yet the silver bloc in Congress has insisted upon and ob tained measures forcing the Treasury to buy huge stocks of unneeded silver. One reason for these misgivings is that the Fund as at present con123 ." Misgivings have been expressed regarding the pro posed International Monetary Fund." They want "world recognition of silver as a monetary metal. These were brought far above the market price from domestic producers and at an artificially boosted price from foreign holders. about which the silver Senators had professed to be especially solicitous. Incidentally. What they see in them principally seems to be one more opportunity to "do something for silver. These Senators come from only a small handful of States. 1945 In the last dozen years the "silver Senators" have had a political influence fantastically out of propor tion to their numbers or to the interests they represent.
Bimetalism or symmetalism. There can be no excuse for amendments merely calculated to embarrass the working of the agreements. The injection of the silver issue would merely delay such a result and further confuse public thought.ceived may postpone rather than expedite a return to the international gold standard. The exchange rate of a na tion on a silver standard would necessarily fluctuate constantly in relation to those nations on a gold stan dard. Some amendments are needed if the Bretton Woods agreements are to accomplish the ends that their sponsors have in view. Only to the extent that the international gold standard is eventually restored is the world likely in the long run to have stable exchanges. not to complicate them. 124 . on the other hand. a great volume of international trade. or designed to appease some selfish in terest or pressure group. would merely introduce needless complications and a new controversial issue at a time when we par ticularly need to avoid as many controversial issues as possible. and a final escape from the chaos of nationally "managed" currencies. But these amendments should be designed to simplify the agreements. No amendment is likely to be in the right direction unless it is sincere and disinterest ed.
The agreements signed at Bretton Woods would end by
creating more chaos in international trade and economic
relations, not less.
Under the old gold standard each
country was responsible for keeping its own currency
sound. Under the Bretton Woods system, an international Fund would be forced to buy depreciated currencies far above their market values, regardless of the reasons for the depreciation. The provision for uniform proportionate devaluation was a provision for periodic world inflation. The system was designed "to make resort to inflation easy, smooth, and above all respectable." The Bretton Woods Agreements also contemplated in ternational commodity controls. There were the strongest reasons to fear that these would mean a revival and exten sion on a far greater scale of the type of commodity controls of the Thirties, which mainly resulted in disastrous failures. The agreements, in short, pretended to provide for a future of "international cooperation", but what they provided for instead was a future of increased State domination and control over economic life. The bleak pro spect was that the individual^ "living standards will decline with his liberties."
The Coming Economic World Pattern
Freedom of trade, in the eyes of Adam Smith and his nineteenth-century successors in the liberal tradi tion, meant freedom from government interference. All that the "classical" economists asked of govern ments in the field of international trade was that they should permit it to occur. They wanted a removal of prohibitions and of nearly all tariffs. But they did not ask for positive "encouragement" or artificial stimulants. They were as much opposed to bounties as they were to barriers. What the older liberals meant by freedom, in short, was freedom of the individual citizen. They asked that he be free to sell his goods to whatever country and whatever market would pay him the best price for them. They asked that he be free to buy whatever he wanted wherever he could get it cheapest. They argued that these freedoms were not only good in themselves, but that they represented by far the best means to bring about the most efficient division of labor and to maximize world production and world
consumption. All they asked of government was that
it enforce the laws against fraud, force, and theft, and
that it refrain from debasing the currency.
The world barriers to international trade in the nineteen-thirties, for which every large nation was in
part responsible, but in the erection of which the totalitarian governments went to the greatest lengths,
brought about such chaos that few responsible per sons now undertake to defend them. High tariffs,
import quotas, export subsidies, competitive currency
depreciation, blocked currencies, bilateral ar rangements, forced barter—all these are today deplored by lip in all respectable circles. The demand now is for International Cooperation.
But when the concrete proposals for this interna tional cooperation are examined, it turns out to be something radically different from the international cooperation hoped for by the older liberals. It is not the freedom of the private citizens of any country to trade with the private citizens of any other. It is not primarily the cooperation among private citizens of different countries at all. It is primarily cooperation among governments. As in the thirties, it is govern ments that are going to take the matter in hand. But instead, as in the wicked thirties, of restricting trade and making economic war upon each other, this time, we are told, the governments are going to direct and stimulate trade in the interests of peace. But when the concrete proposals for this interna tional cooperation are examined, it turns out to be something radically different from the international cooperation hoped for by the older liberals. It is not the freedom of the private citizens of any country to trade with the private citizens of any other. It is not primarily the cooperation among private citizens of different countries at all. It is primarily cooperation among governments. As in the thirties, it is govern128
There are the strongest reasons. precisely because they are represented by their respective governments." Now the way to secure ex change stability. for fearing that this kind of intergovernmental cooperation will break down. It is a pleasant fantasy. are far more likely to clash openly. And these conflicting interests. directly. But perhaps. before we come back to these larger issues. on the other hand. They are almost certain to reflect the special interests of some political pressure group. of restricting trade and making economic war upon each other. this time. it would be well to examine in detail the leading proposals so far put forward for the postwar economic world. as in the wicked thirties.ments that are going to take the matter in hand. but there are the gravest reasons for doubting that it will ever be realized. The proposed International Monetary Fund has as one of its ostensible purposes the promotion of "exchange stability. For government officials. we are told. as worked out before the first World 129 . the governments are going to direct and stimulate trade in the interests of peace. even when they really understand (which is very rarely) the basic economic forces that they are trying to control. The* interests of the pressure groups represented by the bureaucrats of one nation are certain to clash with those of the pressure groups represented by the bureaucrats of another. and politically than in a world of genuine free trade. But instead. The agreements reached by the experts at Bretton Woods seem to typify the intended shape of things to come. and that when it does the resulting chaos in international trade and economic relations will be greater than ever. are almost never disinterested.
sound.War. it saw to it that there was not an excessive expansion of bank credit. as a result of these conditions. When the public was confident. A nation saw to it that the government's bonds were sold to the public. General exchange stability was preserved. that the promise of gold-convertibility would be kept. was clear. A nation kept its own currency It made it convertible on demand into a definite and fixed quantity of gold. To make sure that the promise to pay that fixed quantity of gold would be kept. a nation's currency in the foreign ex change market was stabilized (with comparatively minute fluctuations) in terms of this fixed gold value. This was the international gold standard. or at least make certain that its budget was not too long or too heavily out of balance. It was a form of international cooperation worked out and perfected through the centuries. It saw to it also that the central government did not issue such a volume of debt that its ability to maintain interest on that debt and to retire it would come into question. 130 . It reached its highest development in the latter part of the nineteenth cen tury and in the present century before the first World War. it followed that each gold cur rency was necessarily fixed in terms of every other. to the value of a fixed quantity of gold. by each country's own policy. As each currency was held. so that they were paid for out of real sav ings and not merely out of the creation of additional bank credit. The currencies of other countries were likewise fixed in terms of definite gold values. If a government were to meet all these requirements it had to balance its budget.
or to any definite requirement for gold convertibility. The Fund must keep buying the ruritas at twenty cents. to take a fictitious example. and that each nation shall be responsible for maintaining that link so far as its own currency is concerned. Now the real value of the rurita. Suppose it has a sinking spell. or because Ruritania is having a revolution. How. the Fund proposes that every currency be tied directly to every other. or because it has a Fascist government that has just announced that it is expropriating the property of some minority group. or that everybody shows a sudden desire to get rid of ruritas and to acquire dollars instead. to limitations on inter nal credit expansion. then. Suppose. left to the natural 131 . or because it has a budget deficit brought about by a heavy armament program. does the Fund propose to maintain international currency stability? Instead of contemplating that each currency shall be separately anchored to gold. or simply because it is grinding out too much paper money on its printing presses. This is to be done by forcing the strong currencies automatically to support the weaker. It becomes the duty of the Fund to supply these dollars. at least up to an amount stipulated in advance in the Articles of Agreement. that the Ruritanian rurita has a par value of twenty cents in terms of American dollars. It must do this regardless of whether the rurita is sinking because the Ruritanians are buying more goods from the outside world than they have the exports or credit to pay for.II One will look in vain through the Articles of Agree ment on the International Monetary Fund for any reference to balanced budgets.
while they pay for Ruritania's luxury imports. If a nation wishes to devalue its currency even further. The practical effect of this pressure for a quick answer will be to give the benefit of the doubt to the nation that wants to devaluate. But if the Fund refuses its request the member can simply withdraw. or her Fascist experiment. her armament program. But if. and the Fund must either concur or object within seventy-two hours. even contemplate exchange stability? On the con trary." Each such change must be approved also by every member that has 10 per cent or more of the total of the quotas. It is explicitly stipulated that "the Fund shall raise no ob jection. It is true that an 132 . from an inflationary standpoint. as is most probable. this means that American taxpayers are buying two cent ruritas for twenty cents. it is being bought by dollars. But does the International Monetary Fund. that any nation may at any time devalue its currency 10 per cent. But the most ominous provision of the Fund. it clearly contemplates a great deal of exchange instability. though it explicitly lists that objective among its purposes. thereby immediately losing 90 per cent of their investment on each purchase. if it prefers further devaluation to whatever additional automatic credit it might still be entitled to in the Fund. may be only two cents. is that which permits it by a majority of the total voting power to make "uniform proportionate changes in the par values of the curren cies of all members. it must continue to be bought by the Fund at twenty cents.play of supply and demand. " Any nation may propose a devaluation of its currency by another 10 per cent. It provides. without advance notice. first of all. it must consult the Fund. Nevertheless.
all this is plain enough. Devaluation is the modern euphemism for debasement of the coinage. devaluing nation. All this makes devaluation morally embarrassing to the devaluing nation. know that they have been cheated. all nations would be virtually Now this provision of the Fund is a provision for periodic world inflation. and that the devaluing government. but as devaluation of all other currencies would be certain to cause a prompt drop of commodity prices within a nonforced to participate in the devaluation. There are other embarrassing effects. It means that the promise to pay a certain definite weight of gold has been broken. for its bonds or currency notes. The historic instances in which the par value of the monetary unit has been in creased are so rare as to be negligible.individual member of the Fund. Ill When a nation devalues by acting alone. Foreigners who hold bank deposits in that nation. Devaluation 133 . The value of their claims in terms of their own cur rency immediately drops by the percentage of the devaluation. may be allowed to keep the par value of its currency unchanged. or any obligation of that nation stated in terms of its own currency. if it decides within seventy-two hours. will pay a smaller weight of gold. It always means repudiation. or exchange bills drawn on that nation. The practical political pressures are always in the other direction. They will be paid only 90 or 80 or 50 cents on the dollar. So we are safe in assuming that the "uniform propor tionate changes'* referred to by the Fund mean uniform proportionate devaluations.
because they would be dif ferent pounds. Foreigners. and vice versa. The politicians in power. marks. They call the money of these creditors hot money—though it is. It follows an overexpansion of the government's debt or currency notes or an overexpansion of internal bank credit. merely money that is trying to leave hot places. Though the dollar. seek to put the blame. reading these signs. as before. nations are still embarrassed by this flight of capital and this public evidence of distrust. of course. not on the government that has made its credit and intentions questionable. say. begin to transfer their deposits to other countries that look safer. it is a blow to national pride and prestige for a nation's currency to sell at a discount in the foreign exchange markets. as well as dollars. rubles. in brief.seldom comes out of a clear sky. There would be no flight of capital. In spite of this modern vocabulary. This is called the flight of capital. and economic writers who reflect their point of view. seeking to protect their own position. would go to a discount of 25 or 50 per cent. francs. Moreover. It is obvious that a uniform depreciation of all cur rencies would either remove or conceal most of these embarrassing results to any single government. begin to withdraw their deposits. because every place to which it could go would be equally disadvantageous. and so on. The provision in the Fund for world inflation. Relative foreign exchange rates would remain un changed. A hun dred dollars would still be worth the same number of pounds. is a provision to make resort 134 . the man in the street would hardly suspect it at first because all the external measuring rods would have shrunk in exact proportion. The nation's own citizens. francs. but on the creditors who question them. and rubles. lire.
would be cheated by their governments. Everybody's cost of living would go up. the way will be cleared for encouraging every government in power to follow the easy political path. and to tax lightly. respectable. either private or part of govern ment social security systems. Commodity prices would rise. All those with savings accounts and insurance policies would find them cut by an invisible but real and uniform capital levy. thus continuing chronic budget deficits and financing them by added debt. would find them buying less than before.to inflation easy. The proposed International Monetary Fund is bad from so many aspects that it is difficult to know in ad vance which danger will prove the most serious. Those who lived on pensions. The Fund Agreement does not say in so many words 135 . but the government propaganda agencies would assure them that the latest inflation had merely ushered in a new paradise. The holders of government securities would find the real value of their securities greatly cut. All those with fixed incomes would find themselves subjected to an invisible but real and ungraduated income tax (in addition to the govern ment's acknowledged graduated income tax. In short. By keeping up exchange rates by artificial means. and. private citizens. as before. Any government could continue to pay heavy subsidies to all sorts of pressure groups. smooth. to embark on public works and patronage on a grand scale. But all this will not give us free exchange markets. buying currencies at par regardless of their real market value. and making devaluation easy and respectable. above all. But the real harm that inflation would do would be no less under world-wide inflation than under na tional inflation.
In practice. They would lose the power to dispose of their proper ty as they wished. or travel. like the Fund. is set up on a comparatively conservative basis. To control international capital movements would in practice require supervision and and policing of all exchange transactions. IV Let us turn from the proposed International Monetary Fund to the proposed International Bank for Reconstruction and Development. Here at least is an institution in which. apart from its unncessarily large subscribed capital ($9. for exam ple. therefore.000. But it provides for the continuance of con trols during an indefinite "transition" period. A project. It can exercise discretion. with proper safeguards. It is not to lend or guarantee loans for more than the full amount of its unimpaired subscribed capital.whether there will be a free foreign exchange market or not. people could not buy or sell abroad. The Bank." 136 . The borrower must be "in position to meet its obligations. It is not to make loans on an automatic basis. Still more former freedoms would be abridged or circumscribed. Government power over the lives and actions of its citizens would be extended in yet further directions.100.000). reserves and surplus. without going through a great maze of red tape to get permission from their government to do so. and it encourages permanent controls over capital movements. or to emigrate and take their money with them. the possibilities for good might outweigh the possibilities for harm. for which funds are being asked must be deemed meritorious by a committee selected by the Bank.
it might be made very embarrassing for him to do this. and pro bably assume an even greater share of the risks. There would be psychological and political advantages in making individual nations responsible for payment of their debts to a Bank representing forty-five different nations rather than to a bank merely representing one. It is not necessary here to weigh the relative merits of the proposed International Bank and our existing Export-Import Bank as a medium for making interna tional stabilization loans.Such a Bank. and while most of the loans would doubtless be floated in this market. in the decade immediately following the war. While it is true that the American representative on the Bank would be technically free to veto a proposed loan made in dollars in this market. should engage at this time in the business of international lending at all. our government would have much less to say about the loans and the conditions attached to them than if it were making them alone. either individually or jointly. it could make loans to stabilize their currency to those nations that show a genuine will and capacity to do so. In particular. The International Bank would have the advantage of symbolizing international cooperation. On the other hand. while the United States would supply the lion's share of the lendable funds of such a Bank. could perform a useful service. Whether the proposed International Bank would provide a better medium for this purpose than the ex isting American Export-Import Bank is a question of practical judgment. The first is the whole record of default and repudiation of foreign loans in the inter-war period. But it is important to point out that there are only two sound reasons why governments. This was brought about to some extent by 137 .
in the overwhelming main. not as a man who takes risks and supplies essential aid. Under these conditions world resources are likely to be utilized in the most efficient manner. Where help is needed for humanitarian reasons it should be granted freely and generously. risking their own funds. The second reason why government intervention is now needed is that the terrific disruption brought about by war . If the project for which 138 vestors to make further foreign loans. This record of default and repudiation has will make it extremely difficult for some nations to stabilize their currencies without outside help. they will be made. But where loans are made by government officials who risk other people's funds and not their own. but even more by the prevailing anti-foreign and anticapitalistic ideology which regards the foreign lender. It is contemplated that the loans guaranteed by the proposed International Bank will be guaranteed first of all by some government. Where loans are made by private groups. where the risks seem smallest and the chance of profit greatest. But whatever governmental institutions are used to make such loans should be temporary in nature. The United Nations Relief and Rehabilitation Administration already exists for this purpose. But everything above this should be placed on a strictly business basis. but as an "exploiter" who "throttles" the native led to at least a temporary reluctance of private in economy. as a pure gift. Its scope may need to be expanded. It will never be placed on such a basis if it is managed by governments.real embarrassment on the part of debtors. They should confine themselves to currency stabiliza tion loans only. they are bound to be made primarily for political reasons and will often be wasteful from an economic point of view.
however. V I have dwelt at length upon the proposed Interna tional Fund and Bank because these are specific proposals that have already been presented in detail. for example. It is important to keep in mind that a government would be less likely to think of the broad economic effects of such loans than of their effects in increasing the potential arma ment program or the economic self-efficiency of their country in time of war. by this power to give or refuse guarantees. This would. But indications from many sides have already made it clear that what is being contemplated is a revival and extension on a far greater scale of the type of international commodity controls of the thir139 . At the moment of writing only one of these—the Anglo-American oil agreement—has reached the stage of presentation to the public. it would enable it to make loans only to projects that had home government support. Space unfortunately does not permit an adequate analysis of the proposals for international commodity controls in the postwar period. of course. It would be in a stronger position than otherwise to grant or withhold political favors. These considerations. would not be the same as those that would lead to the most efficient utilization of world resources. The home government. would exercise a great influence on the development and direction of home industry. the Ruritanian government or central bank would have to guarantee the loan before the International Bank would do so. On the other hand. reduce the risk assumed by the International Bank. Quite the contrary.the loan is made is located in Ruritania.
It means. rubber. labor. on the one hand. a propor tional restriction of output is usually placed on each producer subject to the control. To compensate for this. sugar. Almost invariably they follow the same general pat tern. Consumers are forced to pay higher prices than otherwise for that product. and capital that could much more profitably and efficiently be devoted to other uses. copper. to cotton. on the other hand. Many of these peacetime controls have merely been allowed to remain dormant. Controls for some of these existed before the war. The inefficient marginal producer thus ar tificially kept in that line of production continues to tie up land. cocoa. Ostensibly the effort always is merely to "stabilize" the price of the commodity.ties. that the efficient low-cost producers are not permitted to turn out all of the output that they can at a low price. nitrates. The world is just that much poorer. It is being produced less efficiently than otherwise. It means that total world production is cut. coffee. if the planners have their way. This seems likely to apply. wheat. and quinine. The world's consumers are able to enjoy less of that product than they would have en joyed without restriction. This increases the average cost of producing the pro duct. They have just that much less to spend on other products. beef. This has several im mediately bad effects. tea. The result in every such instance is that the price is fixed above the level that market conditions justify. But in every instance (except in one or two where a temporary control has been imposed by some single. A uniform proportional restriction means. that the inefficient high-cost producers are artificially kept in business. The chief controls have proved disastrous failures. tin. powerful governmental buyer) the interests of the producers have been put first. 140 . wool.
we are told. Fixed prices will necessarily involve "just" allotments and allocations for production and consumption among nations. at whatever prices or rates they like and wherever they find it most profitable to do so. Or producers outside the restriction program. This is what happened to the British rubber restriction and the American cotton restriction programs. The plan that started out so bravely to "stabilize" prices and conditions brings incomparably greater instability than the free forces of the market could possibly have brought. but we can be sure of some of the things they do not mean. by the greatest miracle of all. are going to avoid all these errors. this postwar world of super-international controls and coercions is also going to be a world of "free" in ternational trade! Just what the planners mean by free trade in this connection I am not sure. They do not mean the freedom of ordinary people to buy and sell. lend and borrow. but only cynics will anticipate any unseemly international disputes regarding these. stimulated by the artificial rise in price. unsold surpluses of the over-priced commodity continue to pile up until the market for that product finally collapses to a far greater extent than if the control program had never been put into effect. They 141 . Finally. expand their own production enormously. In either case the collapse of prices finally goes to catastrophic lengths that would never have been reached without the restriction scheme. Pro ducing and consuming nations are going to agree on just what these fair prices are. This time prices are going to be fixed that are "fair" not only for producers but for consumers.If this artificial restriction of output does not take place. because no one will be unreasonable. Of course the international commodity controls after the war.
They mean. I suspect. And they tell him that if he docilely obeys the bureaucrats he will be rewarded by a rise in his living standards. the freedom of bureaucrats to settle these matters for him. the international controls of the future seem only too likely to follow the pattern of the past. to take his capital and other belongings with him. But if the planners succeed in ty ing up the idea of international cooperation with the idea of increased State domination and control over economic life. in which case the plain man's living standards will decline with his liberties. to settle where he pleases.do not mean the freedom of the plain citizen to raise as much of a given crop as he wishes. to come and go at will. 142 .
Part II Aftermath .
New York. will be more than compensated by gains in the future. issue of The Reader's Digest and in all its foreign issues of that month. 145 . if it is to save the world from communism and chaos. as it is in the European countries that are expected to benefit from them. principally in Europe. It is assumed that there is a definite deficit that America can make up by loans or gifts. that America must supply this if Europe is to recover. Irvington-on-Hudson.500-word condensation was published in the January. and that therefore it is "good business" for America to make these gifts or loans. In its most widely held form the conclusion rests on the assumption that the present economic difficulties of Europe are in the main the consequences of the destruction and dislocations of war. that Europe's economic recovery is essential for America's prosperity. 1948. This belief is held almost as strongly in the United States. it is argued. A 6.25 Excerpts from "Will Dollars Save the World?"* There is a widespread belief that the United States has a duty to lend or give huge sums to other coun tries. The sacrifices in the present. which would make the sacrifices. * Published in 1947 by The Foundation for Economic Educa tion. even if the loans are never repaid.
This set of assumptions found expression in the celebrated speech of General George C. we must go on to ask ourselves in all candor whether it is the destruction and dislocations of the war or the govern mental policies followed since that war which are primarily responsible for the present European crisis. at Harvard on June 5. The implication of this statement is that Europe's shortages are being imposed upon her by conditions beyond her control. Marshall. Thousands of her houses and factories were destroyed by blitz. 146 . We can never forget that in the war against Nazism England stood for a whole year alone. Yet when all this has been admitted. Most of her foreign investments had to be sold. and that the present import surplus of Europe is solely the result of these shortages and not of other factors. or face economic. social and political deterioration of a very grave character. It would be ungenerous and short-sighted to minimize the appalling physical destruction and the enormous economic and political problems that the last World War brought upon Europe. the American Secretary of State. 1947: The truth of the matter is that Europe's require ments. of foreign food and other essential products—principally from America—are so much greater than her present ability to pay that she must have substan tial additional help. Her peacetime equipment ran down. This is also the contention that runs throughout the report of sixteen European nations on the Marshall plan. Her export trade was reduced to less than a third. for the next three or four years.
on the other hand. At such a rate the brandy could be bought for $5 a bottle in American money. Our real problem is not the past. The arbitrary exchange rate enforced by the French police raises the price as much as would a 147 . The overvaluation of the currency tends.200 francs a bottle. on the other hand. This means that the brandy must cost him more than $10 a bottle. therefore. but what measures and policies are most likely to cure it. but the future. Let us assume that in a free market the franc would sell a little higher—say about 240 to the dollar. When a currency is overvalued (to consider the harmful effects of merely one governmental control) it produces a chronic surplus of imports over exports. This naturally encourages people in that na tion to increase their purchases of imports. to make the prices of that nation's imports cheaper than they would otherwise be in terms of that currency. is 119 to the dollar. The black-market rate for the franc is about 280 to the dollar as this is being written [in 1946]. for example. Suppose. Let us begin. to make the prices of that nation's exports high in terms of other currencies. which the American importer is now forced to pay. we must also keep in mind that the central question we have now to answer is not what caused it.And whatever we decide regarding the causes of the present crisis. But the official rate for the French franc. This discourages other countries from buying. that a French brandy sells in Paris for 1. The main obstacles to European recovery are the present economic policies followed by the governments of Europe. by taking a closer look at the existing situation in Europe. The over valuation of the currency tends.
And this applies to every French export to this country. It is hardly surprising. And inflation at home.100 per cent American import duty (on top of the du ty that we actually impose). that in most European countries there is a chronic excess of imports over exports. if he had to pay 240 francs for the dollar. But as he is able. the would-be French exporter may have to reduce his price in terms of francs if he is to meet the competi tion of other sellers.000 francs. thanks to exchange control and American loans. As if all these discouragements to exports were not enough. foreign or American. if we look at the problem from the other side. to get the dollar for only 119 francs. Yet he may see no reason for doing this. And he must turn them over at the official rate. He must turn 99 per cent of his dollar proceeds over to the govern ment. in the American market.000 francs. the typewriter costs him less than 12. a typewriter that costs $100 in the United States would cost a French buyer. 24. by causing a rise in domestic money incomes. And this applies to every American export to France. because he can realize a larger margin of profit on his domestic sales. Is it surprising. apart from any other factor. in the face of such regula tions. It is hardly sur148 . will cause a rising home demand for goods which other wise would be exported. Is it surprising that Frenchmen should want to buy a great deal from us? Because the overvaluation of the franc makes French goods expensive in terms of dollars. that France is exporting so relatively little to us? In the same way. the French government does not allow the French ex porter to keep the dollars he has made from his ex port sales or to convert them freely.
and as long as the internal policies responsible for it continue. as Secretary Marshall's Harvard speech and the report of the sixteen nations assume. the Commodity Credit Corporation. But the first step toward the resumption of free and normal interna tional trade is the removal of all prohibitions on the rate at which the existing paper currency is bought and sold. however. we have (surviving the now defunct Lend-lease and UNRRA). This trade deficit does not prove. It is being financed today mainly by American governmental loans." It was not primarily brought about by the destructions of war. the Treasury Department has acted as the agency to administer the loan to Great Britain. This chronic excess of im ports is being brought about. on the contrary. either in terms of gold or of other curren cies. That ought to 149 . the Export-Import Bank. that Europe's "re quirements" are this much greater than "her present ability to pay. by Europe's own governmental policies.prising that these countries now buy more than they sell. There will be no long-term economic stability and no real freedom of international trade until nations go back to the gold standard. It will continue as long as those loans con tinue. For the purpose of making loans or grants to Euro pean governments. the Inter national Monetary Fund and the International Bank for Reconstruction and Development. In addition.
Of the two international institutions. Such a use of the resources of the Fund not only fails to do any good. and creates a need for still more loans. is being used to keep the franc far above its real purchasing power and at a level which encourages imports and discourages exports. Its managers are virtually without the power to insist on internal fiscal or economic reforms before they grant their credits.000. The International Bank also lacks clear power to in sist on reforms. As distinguished from the Fund. This merely prolongs the unbalance of French trade. the Fund in its present form ought not to exist at all. however.000 credit granted by the Fund to France. but does positive harm.be about enough government foreign lending agen cies without thinking up still another. it at least has power to refuse loans unless the borrower is "in position to meet its obligations." 150 . A $25. for example.
All that was necessary. What has been the result? The British pound. N. they blandly explained. The argument put forward by the sponsors of that system was that if would promote international trade and domestic prosperity by stabilizing the values of national currencies and maintaining fixed and dependable exchange ratios between them. Then every currency would support all the others. was to make one key currency—the American dollar—directly convertible into gold. was devalued again. and everything would be just dandy.86 to $4. 1967 The devaluation of the British pound from $2. 1949.. All the others could simply be tied to each other by being tied to the dollar. in September.26 Collapse of a System* November 21. in 1944. which had already been devalued from $4.03 *Reprinted by permission of the Los Angeles Times Syndicate.H.03 when it entered the International Monetary Fund. 151 .80 to $2. it is another revelation of the bankruptcy of the international money system con cocted at Bretton Woods. from $4.40 is not only another declaration of bankruptcy by Great Britain.
in fact. that has not been devalued at least once. "special drawing rights. private banks and firms and individuals all over the world who trusted the British government's solemn pledges that the pound . Not until at least several months from now edifice has been shaken. without exception. The first losers are the central banks. The new devaluation of the pound to $2. At least an open devaluation of an individual cur rency. bought to $2. Maybe some of the "new economists" (though I further uniform international inflation and monetary depreciation that will not show up in the quoted ex change values of individual currencies. 18 every currency. will we know how seriously the world monetary And yet throughout the last 20 years we have been hearing and reading from official sources nothing but endlessly repeated statements about how "successful ly" the fund system has been functioning. Since the fund opened for business. there is hardly one of its hundred or more member curren cies.tions of other currencies within a single week.80. That action touched off 25 more devalua less than it did when the fund started. These special drawing rights are nothing more than a new form of paper money or paper credit designed to make possible a doubt it) will at last begin asking themselves whether the international gold standard may have had some 152 would not again be devalued. like that of the pound to $2. Even before Nov.40. Only this fall the fund members triumphantly announced a new gimmick. with the exception of the dollar.40 has already touched off a series of more devaluation of other cur rencies." to make the system still more successful. lets us see just who is being swindled and by how much.
the government will have to slash billions off the Great Society welfare spending and stop the swelling deficit and the con stant increase in the paper money supply. the devaluation of the pound will bring tremendous pressure on the dollar. the deficits of the socialized industries. Johnson has still given no sign that he seriously means to do anything in this direction. But if this commitment is to be kept. Prime Minister Harold Wilson fatuously blames uthe speculators/' but the real cause of the pound's new downfall is the attempt of Britain to live beyond its means—the cradle-tograve security. Mr. The President has reaf firmed "unequivocally the commitment of the United States to buy and sell gold at the existing price of $35 an ounce.advantages that they could have overlooked. Of course. all financed by budget deficits and the printing of more money. The Johnson Ad ministration's ability and will to deal with this are more than questionable." This is all very well as far as it goes. 153 . Another bankruptcy that the new devaluation em phasizes is the welfare state.
*Reprinted by permission of the Los Angeles Times Syndicate. They would include an immediate slash in projected government expenditures. The Labor government in Britain will never give up its socialistic obsessions. It could still be saved by heroic measures. an immediate balancing of the budget. some constant increase in its stock of paper money. in varying degree. and a halt in any further increase in the stock of money. especially if these were taken in the United States. now operates on the fixed assumption that at least some inflation. 155 . these measures are in the highest degree unlikely. And nearly every other country.27 The Coming Monetary Collapse* March 23. 1969 The international monetary system set up at Bret- ton Woods in 1944 is on the verge of breaking down. Charles de Gaulle is caught in a chronic dilemma of either yielding to untenable wage demands or having his country paralyzed by strikes. is necessary to prevent an economic slowdown or setback. But in the present political and ideological at mosphere. Parallel measures are even more unlikely in Britain or in France.
if gold were in fact be ing freely paid out on demand to foreign central banks wanting it and legally entitled to demand it. If it does. It is most likely to end in the midst of some run or crisis in the foreign exchange market.4 billion at the end of 1967 and then to $10. The time must come when even the thin fiction of maintaining the convertibility of the dollar into gold at $35 an ounce will end. week after week.7 billion American short-term liabilities to foreign banks alone. and a diminishing stock of American holdings of gold. We have been getting ever closer to that point.1 billion more such liabilities to other foreigners).In this situation. with confidence in the dollar as shaky as it is today (with $13. the conse quences for the United States and the world will be grave. Our Treasury gold stock fell from $22. have been practically negligible. 1968. with> a constantly increasing amount of irredeemable paper currency. an increas ing distrust of that currency. since then. not to speak of $20. and even token gold-convertibility ends.367 billion in the week ended June 12. when the two-price system for gold was adopted. and there would be no fixed 156 . but even the changes in this figure since last March. This would simply not be possible. it seems likely that one of these days the United States will be openly forced to refuse to pay out any more of its gold at $35 an ounce even to foreign central banks. Currencies would begin fluctuating wildly in terms of each other. It has remained at exactly that figure. It is true that at least up to the end of January a lit tle less than $500 million additional gold was in our exchange stabilization fund.8 billion at the end of 1957 to $12.
yardstick or benchmark against which to measure the depreciation of any of them. 157 . but it would lead to gold becoming once more a de facto international medium of ex change. that the mo ment our government does openly cease to keep the dollar convertible into gold at $35 an ounce. or holding of gold by its own citizens. selling. It is devoutly to be hoped. and it would greatly mitigate the harm done until a new international gold standard could be of ficially established. therefore. it will at least simultaneously repeal all prohibitions on the buying. This would not only enable private individuals to protect themselves against further depreciation of paper dollars. The complete and acknowledged suspension of gold convertibility is the grim outlook we face if our Treasury officials and monetary managers com placently continue to inflate while pretending that nothing very serious is happening to the dollar.
but a consequence of the inherently inflationary institutions set up in 1944 under the leadership of Lord Keynes of England and Harry Dex ter White of the United States. That should have been obvious when it was first set up at Bretton Woods. New York. 1949.H. In an epilogue I discuss the measures needed to ex tricate ourselves from the present international monetary crisis and to prevent a repetition. The system not only permits and encourages but almost compels world inflation. It is not merely the result of mistakes in the recent economic and monetary policies of individual nations. I do this to emphasize that today's crisis could have been predicted twenty years ago. Foundation for Eco nomic Education. There follows a reprint of the article I wrote in Newsweek of October 3. 159 . at the time of another major world monetary crisis.28 World Inflation Factory* August. Irvington-On-Hudson.. in 1944. 1971 The latest crisis in the foreign exchanges illustrates once more the inherent unsoundness of the Interna tional Monetary Fund system. N. *Reprinted by permission from The Freeman.
This world monetary earthquake will carry many lessons. It ought to destroy forever the superstitious modern faith in the wisdom of governmental economic planners and monetary managers. 1947: "It is precisely because their currencies are ridiculously *Copyright® Newsweek. the International Monetary Fund contended that the trade deficits of European countries "would not be appreciably narrowed by changes in their currency parities/' I wrote in Newsweek of March 3. This sudden and violent reversal proves that the monetary bureaucrats did not understand what they were doing in the preceding five years. Reprinted by permission. 160 . 18. Nothing quite comparable with this has ever happened before in the history of the world. This column has been insisting for years. on the evil conse quences of overvalued currencies. 1946. Inc.The World Monetary Earthquake* Within a single week 25 nations have deliberately slashed the values of their currencies. Unfortunately. On Dec. with perhaps tiresome reiteration. it gives no good ground for supposing that they understand what they are doing now.
as well as inmy book. And the tragedy was that former Secretary of State Marshall. accepted this European theory and poured billions of the American taxpayers' dollars in to the hands of European governments to finance the trade deficits that they themselves were bringing about by their socialism and exchange controls with overvalued currencies. They recognized that most European currencies were overvalued. or negligibly little to do. the Presi dent." In the issue of Sept." But the only "realistic" currency valuation (as long as a currency is 161 . They did not ask for the simple abolition of ex change controls. 18 of this year the European bureaucrats continued to insist that their currencies were not overvalued and that even if they were this had nothing to do. It is precisely this overvaluation which brings about the so-called dollar scarcity/' Yet until Sept. and Congress completely misunderstanding the real situation. Will Dollars Save the World? I wrote: "Nearly every currency in the world (with a few exceptions like the Swiss franc) is overvalued in terms of the dollar. with their trade deficits and the "dollar shortage" that they con tinued to blame on America.) They proposed instead that official curren cy valuations be made "realistic. They recognized that this overvaluation was a real factor in causing the so-called "dollar shortage" and unbalancing and choking world trade.overvalued that the imports of these countries are overencouraged and their export industries cannot get started. But they proposed the wrong cure. In time the managers of the Monetary Fund learned half the lesson.1947. 8. (Their own organization in its very origin was tied up with the maintenance of exchange controls.
Their internal 162 . Sir Stafford Cripps fought to the last against the idea that the rate of the pound had anything to do with the deepening British crisis. And on the theory that what's worth doing is worth overdoing. he slashed the par value of the pound overnight from $4. They are the only rates that permit full and free conver tibility of paper currencies into each other at all times. in other words. will now undergo still another epidemic of suppressed inflation. There are strong reasons (which space does not per mit me to spell out at this time) for concluding that the new pound parity he adopted was well below what the real free-market level of widely usable ster ling was or would have been on the day he made the change. 18 but to make a real devaluation. This change in the rate of exchange is one of those conditions and the most important one" (my italics).not made freely convertible into a definite weight of gold) is the valuation that a free market would place upon it. We "must try and create conditions/' he said. Trying to look and talk as much like God as possible.03 to $2. he dismissed all such contentions with celestial disdain. therefore. But at the eleventh hour he underwent an intellectual conver sion that was almost appallingly complete. These countries. Free-market rates are the only rates that keep demand and supply constantly in balance. What he did.80. was not merely to adjust the pound to its market value as of Sept. The first consequence was to let loose a world scramble for competitive devaluation far beyond anything witnessed in the 30's. Most nations fixed new rates lower than their existing real price and cost levels called for. "in which the sterling area is not prevented from earning the dollars we need.
the governments will try to combat this by more internal price-fixing and rationing. and wage fixing. our shores. Marshall-plan aid with undervalued European currencies should be un necessary. we may soon witness the reversal of the world flow of gold. In fact. For the first time since 1933 (if we omit the war years 1944 and 1945) gold may move away from.But the socialists will never consent 163 . on the contrary. instead of toward. The chief barrier that has held up a two-way flow of world trade in the last five years has at last been broken. This will increase our problems at a time when the unions are pressing for a wage increase in the camouflaged form of insurance-pension benefits. In this country. is nonetheless a tremendous gain. The best British comment I have read since the devaluation comes from The London Daily Express: "Let every foreign country pay what it thinks the pound is worth. The chief excuses for maintaining the strangling worldwide network of trade restrictions and controls have at last been destroyed.prices and living costs will start to soar. the tendency will be to drag down our price level somewhat by lowering the dollar price of imported commodities and forcing reductions in the dollar price of export commodities. Were it not for the echoes of the atomic explosion in Russia. But getting rid of overvalued currencies. the outlook for world economic freedom would at last be brighter.. Unions will strike for higher wages. Marshall-plan aid with overvalued European currencies was largely futile. And if the past (or Sir Staf ford's Sept. 18 talk) is any guide. It will be necessary to re-examine our whole foreign economic policy in the light of the new exchange rates.. un balanced budgets. even in the wrong way. continued or increased food subsidies.
The dollar "shortage" disappeared. In September. Our 1949 gold stock of nearly $25 billion proved to be its high point. like the old international gold standard. our monetary authorities began to inflate our own currency at a greatly in creased rate. 1971. and by December. proved correct. was $225 billion. It would mean abandonment of their system of controls. Some of them wanted inconvertible paper currencies free to flue164 . What would otherwise have been a slight tendency for our prices to fall was offset by an expansion of our money sup ply.." Epilogue 1971 The prediction made in this 1949 piece. 1949. money stock (currency in the hands of the public plus demand bank deposits) was $111. But all this should not have been too difficult to predict. The figure at the end of May. The deficit in our balance of payments.If you set money free you set the people free. In September. It is important to remember that the present world monetary system is not a natural growth. and was soon succeeded by a dollar flood. began in 1950. two years before the 1949 crisis.S. The decline accelerated after 1957 when our balance-of-payments deficits started to reach major proportions. but an arbitrary scheme devised by a handful of monetary bureaucrats who did not even agree with each other. it was only $110 billion. 1947. For on top of the great world realignment of currency values in 1949. in fact. But by December 1950 it had reached $115.9 billion.to free the pound.2 billion. that the flow of gold would be reversed. the U.. $122 billion. 1951. Thereafter it declined.
So a compromise was adopted. you could at least call it a gold-exchange standard. In fact." which meant fixed values for each currency in relation to the others. private citizens were forbidden to ask for or even to own gold. The American dollar alone was to be convertible into a fixed amount (one thirty-fifth of an ounce) of gold on demand. If you could not call it a gold standard. But only on the demand of official central banks." Others wanted "exchange stability. Even this expansion might have had a definite limit if the 165 . through the dollar. or a dollar-exchange standard. Then every other nation but the U. was to fix a "par value" of its currency unit in terms of the dollar. That had been the essence of the classic gold standard.tuate in the foreign exchange markets and "managed" by each country's own bureaucrats solely in accor dance with "the needs of the domestic economy. and it was to maintain this fixed value by agreeing either to buy or sell dollars to whatever extent necessary to maintain its currency in the market within 1 percent of its parity.S. This system seemed to have also the great virtue of "economizing" gold. But the system. not of private holders of dollars. tying them at a fixed ratio to gold. The Burden of Responsibility Thus there was devised a system which appeared to "stabilize" all currencies by tying them up at fixed rates to each other—and even indirectly. precisely because it "economized reserves. But none of them wanted constant conver tibility of his country's currency by any holder into a fixed weight of gold on demand." also permitted an enormous inflationary expansion in the supply of nearly all currencies.
U.S. monetary managers had constantly recognized the awesome burdens and responsibilities that the
system put upon the dollar. Other countries could go
on inflationary sprees without hurting anybody but themselves; but the new system assumed that the American managers, at least, must always stay sober. They would refrain from anything but the most moderate expansion to keep the dollar constantly convertible into gold. But the system was not such as to keep the managers responsible. Under the old gold standard, if a country over-expanded its money and credit and pushed down interest rates, it immediately began to lose gold. This forced it to raise interest rates again and contract its currency and credit. A "deficit in the balance of payments" was quickly and almost automatically corrected. The debtor country lost
what the creditor country gained.
Just Print Another Billion
But under the gold-exchange or dollar standard, the debtor country does not lose what the creditor country gains. If the U.S. owes $1 billion to West Germany, it simply ships over a billion paper dollars. The U.S. loses nothing, because in effect it either prints the billion dollars or replaces those shipped by printing another billion dollars. The German Bundesbank then uses these paper dollars, these American I.O.U.'s, as "reserves" against which it can
issue more D-marks.
This "gold-exchange" system began to grow up in 1920 and 1921. But the Bretton Woods agreements of 1944 made things much worse. Under these agreements each country pledged itself to accept other countries' currencies at par. When holders of
dollars shipped them into Germany, the Bundesbank had to buy them up to any amount at par with D-marks. Germany could do this, in effect, by print ing more paper marks to buy more paper dollars. The transaction increased both Germany's "reserves" and its domestic currency supply. So while our monetary authorities were boasting that the American inflation was at least less than some inflations in Europe and elsewhere, they forgot that some of these foreign inflations were at least in part the result of our own inflation. Part of the
dollars we were printing were not pushing up our own
prices at home because they went abroad and pushed
up prices abroad.
The IMF system, in brief, has been at least partly responsible for the world inflation of the last twentyfive years, with its increasingly ominous economic,
political, and moral consequences.
What Should be Done Now?
As long as the world's currencies continue to con
sist of inconvertible paper there is no point in setting
new fixed parities for them. What is a "realistic" rate for any currency today (in terms of others) will be an unrealistic one tomorrow, because each country will be inflating at a different rate. The first step to be taken is the one that West Germany and a few others have already taken. No country should any longer be obliged to keep its cur rency at par by the device of buying and selling the dollar or any other paper currency at par. Paper cur rencies should be allowed to "float," with their prices determined by supply and demand on the market. This will tend to keep them always "in equilibrium," and the market will daily show which currencies are
getting stronger and which are getting weaker. The
daily changes in prices will serve as early warning signals both to the nationals of each country and to the managers. Floating rates will be to some extent disorderly and unsettling; but they will be much less so in the long run than pegged rates supported by secret govern ment buying and selling operations. Floating rates, would moreover, most likely prove a transitional
system. It is unlikely that the businessmen of any major nation will long tolerate a paper money fluc tuating in value daily.
The next monetary reform step should be for the central banks of all countries to agree at least not to add further to their holdings of paper dollars, pounds, or other "reserve" currencies.
Let Citizens Own Gold
The next step applies to the U.S. alone. There ap pears to be no alternative now to our government doing frankly and de jure what for the last three years it has been doing without acknowledgment but de fac to: it should openly announce that it can no longer undertake to convert dollars into gold at $35 an ounce. It owns only about $1 in gold for every $45 paper dollars outstanding. Its dollar obligations to foreign central banks alone are now more than twice its holdings of gold. It if really allowed free conver sion it would be bailed out of its remaining gold holdings within a week.
The government should also announce that until further notice it will neither buy nor sell gold. Simultaneously, however, the United States should repeal all prohibitions against its citizens owning, buying, selling, or making contracts in gold. This
if not the international money. to a gold standard. Only abstention from inflating can make a gold standard workable. this would prepare the way for the return of national cur rencies. Gold. Stop the Reckless Government Spending that Brings Inflation All this concerns technique. David Ricardo summed up this reciprocal relation more than 160 years ago: Though it [paper money] has no intrinsic value. the budget must be consistently balanced. it would mean that interna tional trade and investment would soon be increasingly conducted in terms of gold. Even if there were no formal international agreement. in turn. provides the indispensable discipline to enforce abstention from inflating. or of bullion in that coin.would mean the restoration of a really free gold market here. but a gold standard. by limiting its quantity. even if not "monetized" by any government. On the foreign-exchange markets national paper cur rencies would be quoted in terms of gold. yet. 169 . would become an international money. and elsewhere be brought to a halt. What is essential is that the inflation in the U... with a weight of gold as the unit of account. What chiefly matters is national economic and monetary policy. country by country. monetary managers as well as private banks must be deprived of the power of constantly and recklessly increasing the money supply. Incidentally. its value in exchange is as great as an equal denomination of coin. Government spend ing must be slashed.. because of distrust of floating paper currencies.S.
therefore. the issue of paper money ought to be under some check and Experience.that power. in all states. and none seems so proper for that pur pose as that of subjecting the issuers of paper money to the obligation of paying their notes either in gold coin or bullion. however. shows that neither a state nor a bank ever has had the unrestricted power of issuing paper money without abusing control. 170 .
But the details of this answer can be complicated. from the fateful conference at Bretton Woods to the present. They are responding to the demands. a volcanic eruption. the more difficult it becomes to stop. our government officeholders.29 What Must We Do Now? 1983 This concludes our 40-year history of inflation. that falls upon us from without like an earthquake. If we wish to narrow the blame. we may say that it is something brought about by the ac tions of our politicians. of the ma jority of voters. but the longer it has lasted. But our politicians act as they do because they want to be elected or re-elected. Inflation is not some great natural disaster. It is always very easy to start an inflation. We must stop inflating. and the further it has been allow ed to progress. or a flood. Let us begin by making a few points clear. 172 . Neither is it some economic accident that is nobody's fault. What lessons does it teach us? What must we do about it now? The short answer to these questions is obvious. or the presumed demands. It is something we bring about by our own actions. and the political obstacles to getting it done are all but insurmountable.
And so on. When surplus milk production reduces farm income. Much of this growth is generated by the programs themselves. It offers relief payments. 173 . It initiates a system of unemployment insurance which begins making payments automatically. Unemployment in surance entitlements are raised. the politicians set a minimum price for milk and order the government to buy whatever amount is necessary to maintain that price. an elaborate Social Security system. to anybody who has quit or been thrown out of work. for 15 weeks. to people assumed to be in need "through no fault of their own. starts giving it away. The government sets up. Social Security causes more and more people to retire early. say. in the form of butter or cheese. and other subsidies also mount. so they increase the sub sidies they have already established." It offers subsidies to farmers for growing less. At first the politicians pay for all these benefits by raising taxes. Social Security benefit payments are increased. to guarantee everybody enough to retire on after the age of 65.The cycle begins. Unemployment insurance pro longs unemployment. food stamps. Minimum prices for milk increase the output of milk. Relief payments. and sometimes to 39. The politicians begin to run out of ideas for additional types of subsidies. extended to 26 weeks. and when the amount in storage becomes appallingly high. And all these programs are justified as the minimum duty of a "compas sionate" government. but this becomes increasingly un popular. say. when the politicians in power decide to confer special benefits on favored groups. or issues food stamps. The politicians provide a score of other handouts or subsidies. for example. The government puts this in storage.
The government pays for the deficits by going further into debt or prints more and more inconvertible paper money. They must begin not in some indefinite future. and the politi cians are unduly complacent at the moment because 174 . politically and economically. Budgets become unbalanced and stay unbalanced. The candid recognition of this outlook clearly tells us what must now be done. but at the earliest possible moment. much less halting it. $194 billion in fiscal 1985. To be specific.It becomes increasingly difficult. Is this asking for the "politically impossible"? We can't say. to impose still heavier taxes. 31. When one considers that future budget deficits have been chronically underestimated in the past. "Entitlements" grow. 1983. $148 billion in 1986. the bulk of the press. Any proposal for the slightest reduc tion is treated as outrageous. Though the tax burden has steadily mounted. $142 billion in 1987. These deficits have been growing at an accelerative rate. The public. But what we can say is that if it is not done very soon the consequences will be economically disastrous. there have been 45 deficits in the 53 years since 1930. the outlook at the moment of writing this is frightening.8 billion in the fiscal year 1984. Congress and the Administration must stop the deficit spending. and $117 billion in 1988. The recip ients of subsidies and other handouts come to regard them as a right. President Reagan—even on the assumption that the cutbacks and freezes in spending proposed in his budget message of Jan. will be adoptedprojected a deficit of $188. No politician dares suggest reducing any subsidy. the United States government has not balanced its budget since the fiscal year 1969.
The result is that the dollar. they have been much worse in many other countries. even since we have been off the gold standard. While this step may seem less urgent than bringing domestic government spending under control and restricting the issuance of more 175 . The value of a currency. and the consequent strict control of further increases in the money supply. has slowed down in the last few years (from the 13. It is far easier to forestall an inflationary panic—a "crack-up boom"—than to stop it once it has started. as the most urgent of all measures.) But this has been brought about by causes that can change at any moment. But a sudden lack of confidence in the dollar itself could change this situation overnight. I have put first the halting of domestic deficits (by reduction of spending and not by a further increase in the tax burden)." The greater distrust of other currencies has increased the world demand for the dollar. What they see is that "the rate of inflation".9 percent in 1982. as they call it (by which they mean the rise in "the price level"). If a flight from the dollar suddenly developed. Bad as inflationary condi tions have been in the United States. is deter mined by people's beliefs and expectations rather than directly by the objective facts. like the value of stocks and bonds and commodities on the exchanges. But close behind it is the need to abolish the inflationary practices and international lending institutions set up by the Bretton Woods Agreements of 1944.3 percent in 1979 to 3. for example. we could quickly be thrown into a hyper-inflation.they have been looking backward instead of forward. has remained the world's prin cipal "reserve currency. Let us hope that our politicians and monetary authorities will begin to act responsibly before that happens.
even by most economists. the urgency of halting the deficits has been ignored. For as I have emphasized in the preceding pages. I recognize. it is nonetheless an inseparable part of what must now be done. may have its imperfections. but systematically give these inflations. it obliges the government to sell its bonds in the open market to raise the money to meet the deficits. that in creases in the money supply are usually the most direct objective cause for the consequent fall in the purchasing power of the monetary unit. This in turn forces up interest rates to oppressive levels for private business. The world must return to a gold standard. the Federal Reserve refrains from monetizing the deficits as they appear.paper money. and their chronic persistence is the chief cause of the fear of future infla tion. than is customary. as has happened in this country in the last few years. of course. and the pure paper-money basis on which it now rests. One more step is an essential part of the antiinflation program I have just outlined. But when. and the socialistic policies that bring them about. The result is a dangerous complacency. as its detractors insist. and brings recession and unemployment. A word must be said at this point about a question that still seems to be little understood. But because of the present dominance of a strict mechanical quantity theory of money among many economists. But budget deficits are nearly always the chief reason why the quantity of money is increased. but all 176 . the International Monetary Fund. That standard. acquiescence and en couragement. and less on changes in the money supply. not only superimpose a world inflation upon all the individual national inflations. I have put more emphasis on budget deficits.
these are more than offset by one decisive negative virtue: it takes our money out of the hands of the politicians.. Moreover.shows that neither a state nor a bank ever has had the unrestricted power of issuing paper money without abusing that power. and almost none of them are in positions of political power.) And to quote once more the words of David Ricardo in 1817: "Experience. if we assume that we should try to return to the traditional government-managed type of gold standard. there are only a comparative handful of economists who recognize this. When the value of the paper currency unit has totally disappeared. the technical problem of returning to it without precipitating a serious deflation or inflation.. in all states." (The Theory of Money and Credit. the problem of fixing a new legal ratio between the outstanding paper currency 177 ." In 1983. the French assignats in 1797. as with the American Continen tals in 1780. has never been so difficult as it is today. As Ludwig von Mises once put it: 'The excellence of the gold standard is to be seen in the fact that it renders the determination of the monetary unit's purchasing power independent of the policies of governments and political parties. the issue of paper money ought to be under some check and control. and none seems so proper for that purpose as that of subjecting the issuers of paper money to the obligation of paying their notes either in gold coin or bullion. therefore. 1953. alas. and the German mark in 1923. as even few of the present supporters of a gold standard recognize.
and about how long the present inflation will continue and to what heights it will drive paper-dollar prices. But. 1931. The government can set a date for restoring a gold standard and make a reasonably good estimate of a workable and sustainable rate of conversion. we will bring on a further inflation. if we set it too low. the restoration was achieved only at the cost of a long and painful deflation. in the last few years. The problem that we face today in the United States is that of fixing a workable rate of conversion. in fact. If Congress and the Administration announce a determination to return to a gold standard. if they can stop or very strictly limit the growth of the paper-money issuance for a similar period. given a return of political responsiblity and courage.and gold does not arise. the problem is not insoluble. We could of course return to a merely private gold 178 . influenced mainly by changes in speculative expectations about interest rates. This has fluctuated wildly. the market price of gold will quickly show a tendency to stabilize. and England went off gold again in September. the restored former level could not be maintained. if they can balance the budget and keep it balanced for a couple of years. If we set the "price" of gold in paper dollars too high. we may bring on a serious deflation. and in England in 1925—when a currency that had gone off the gold standard and depreciated was restored to it at its former rate. But at times in the past—in the United States in 1875 and 1879. intensifying the world depression already under way. In England. We cannot be guided simply by the current world market gold price. The country simply goes back to gold money. even from day to day.
when the paper dollar has become worthless. Fortunately. and millions of Americans have been ruined. abolish the IMF over night. But we can at least put a termina tion to our own contributions. but this is likely to happen only by default. We can urge that the Fund be prevented from making any further increase in its enormous net volume of outstanding loans. What we are asking of our politicians is not unreasonable: Let them at least stop subsidizing the socialistic programs and inflations of other countries. The business of foreign lending can once more be left to private in vestors. We cannot. genuinely concerned about the soundness of their loans. We have been drawn into considering the whole problem of what we must do to halt the present American and world inflation. 179 . I shall ab stain from discussing such a possibility. of course. this part of the present world infla tionary problem is more easily solved than most of the rest. we will meet determined resistance from most of the other members of the United Nations. and start devoting itself to getting repaid. Our discussion has carried us much beyond the narrower subject with which this book has concerned itself—the fatal stimulus to world inflation provided by the Interna tional Monetary Fund and the whole ideology em bodied in the Bretton Woods Agreements of 40 years ago.standard. For one thing.
97 K Kemmerer. 104. 96. 27 Hayek. 5. 153 Johnson Act. 4 . 4 Goschen. 16. Charles. 6 G George Arents Research Library (Syracuse University). Robert. 16 Commercial and Financial Chronicle. 94. Edwin. 33 Great Britain. 72-75 Boothby.. George Leslie. Elizabeth B.. 21 B Belgium. 145. 71. Sir Stafford. 4 D de Gaulle. 105-6 Brazil. Viscount George Joachim.INDEX A Aldrich. Benjamin M. Anderson.. 133. 76-79.. 80-82. 15 Johnson. 80. 52. 66. 149-51. Friedrich A. 90. 163 Currier. 13. 149 Cripps. 77. 106.6. 7. 69 Foundation for Economic Education. See also England Group of Thirty. 90 Argentina. 66. Winthrop W. 6 France.. 3. 116 American Scholar. 54. 111. 66. 114-17 Commodity Credit Corporation. 64-67 American Bankers Assn. Lyndon. 77. 107 Keynes. Lord John Maynard. 155 E England. 16 C Chile. 5. 159 Koether. 19 I J India. George. 149 F Foreign Affairs. 88. 21 H Harrison. See also Great Britain Export-Import Bank (United States). 101. 162. 90 Committee for Economic Development. 148 Freeman.
6. 51. Flora. Ludwig. 7 London Daily Express. 90 Mises. Hans. 177 Roosevelt... Montagu C. 116 New York Times. 13. 5. Harry S. 8. Jacques de. Ludwig von. 123 South Korea. George C. Donald T. 169-70. 106 Truman. 61. 169 Regan. 92.. Richard M. 27 P Pakistan. John Stuart.. 6 M Marshall. 19 Smith. 15 T The Times (London). 16 Lewis.. 4. William E. 16 Political Science Quarterly. 5.L Larosiere. 15 Paul. 49. 16 R Reagan. 18 Ricardo. 80-81. 159 Nixon. See Great Britain V von Mises. 57. 5. 134. 57. 21. 146 Mexico. 101. 105 Newsweek. 92-94 S Simon. 16. David.. 75. 7. See Mises. 6. 21 Philippines. 16. 18 Norman. Ron. 107 Portugal. 20 Mill. 14. 172 Morgenthau. 7. 17. Franklin D. 159-60 Los Angeles Times Syndicate. 96-98. Ronald. 73. Ludwig von . 21 Mitterrand. 157 Turkey. 15 U UNRRA (United Nations Relief and Rehabilitation Administration). 21. 84-85 N New York State Bankers Assn. Francois. 7. Adam. 149 United Kingdom.
15 . 17. 159 Will Dollars Save the World (Hazlitt). 153 I Yugoslavia. 13. 81. 7. Harold. 161 Williams. Harry Dexter. 19 White. 68-71 Wilson. 5. 145-150.W Wall Street Journal.. John H.

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