From Bretton Woods to World Inflation

8/7/2019 From Bretton Woods to World Inflation

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FROM.'

BRETTON WOODSTO

REGNERY GATEWAY CHICAGO


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WORLD INFLATIONA STUDY OFCAUSES AND CONSEQUENCES

Henry Hazlitt


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Second printingCopyright 1984 by Henry Hazlitt.All rights reserved.New York Times editorials of 1934, 1944, and 1945 are copyright bythe New York Times Company. Reprinted by permission.No part of this book may be reproduced in any form or by any electronicor mechanical means, including information storage and retrieval systems,without permission in writing from the publisher, except by a reviewerwho may quote brief passages in a review.Published by Regnery Gateway, Inc.360 West Superior StreetChicago, Illinois 60610Library of Congress Cataloging in Publication DataHazlitt, Henry, 1894-From Bretton Woods to world inflation.

1. International finance-Addresses, essays, lectures. 2. UnitedNations Monetary and Financial Conference (1944: Bretton Woods,N. H.)-Addresses, essays, lectures. 3. International MonetaryFund-Addresses, essays, lectures. 4. Inflation (Finance)-Addresses,essays, lectures. I. Title.HG3881.H36 1983 332.4'566 83-43042 ISBN 0-89526-617-2Manufactured in the United States of America.


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CONTENTSIntroduction

Part I: Birth of theBretton Woods System

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1. The Return to Gold 312. For Stable Exchanges 353. For World Inflation? 394. How Will it Stabilize? 435. The Monetary Conference 476. Results at Bretton Woods 537. An International Bank? 578. The Monetary Fund 619. To Make Trade Free 6510. Mr. Aldrich's Monetary Plan 6911. International Money Plans 7312. Europe's Monetary Maze 7713. Bankers on Bretton Woods 8114. The Fund and the Bank 8515. Freedom of Exchange 8916. Supply Creates Demand 9317. Bretton Woods Proposals 9718. More on Bretton Woods 10119. The Bretton Woods Bill 10520. Money Plan Obscurities 10921. Gold Vs. Nationalism 11522. The CED on Bretton Woods 119

23. Silver Boys in Bretton Woods 12324. The Coming Economic World Pattern 127


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Part II: The Aftermath

25. Excerpts from Will Dollars Save the World? 14526. Collapse of a System 15127. The Coming Monetary Collapse 15528. World Inflation Factory 15929. What Must We Do Now? 172


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Introduction

The purpose of this book is to r e ~ e x a m i n e theconsequences of the decisions made by the r e p r e s e n ~tatives of the f o r t y ~ f i v e nations at Bretton Woods,New Hampshire, forty years ago. These decisions,and the institutions set up to carry them out, have ledus to the present world monetary chaos. For the firsttime in history, every nation is on an inconvertiblepaper money basis. As a result, every nation is i n flating, some at an appalling rate. This has broughteconomic disruption, chronic unemployment, andanxiety, destitution, and despair to untold millions offamilies.It is not that inflation had not occurred before theBretton Woods Conference in July, 1944. Inflation'swidespread existence at the time, in fact, was the veryreason the conference was called. But at thatmeeting, chiefly under the leadership of JohnMaynard Keynes of England, all the wrong decisionswere made. Inflation was institutionalized. And inspite of the mounting monetary chaos since then, theworld's political officeholders have never seriously r e examined the inflationist assumptions that guided theauthors of the Bretton Woods agreements. The main

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institution set up at Bretton Woods, the InternationalMonetary Fund, has not only been retained, its infla,tionary powers and practices have been enormouslyexpanded.Yet this book would never have been put togetherhad it not been for the encouragement and initiativeof my friends, Elizabeth B. Currier, Executive VicePresident of the Committee for Monetary Research &Education, and George Koether. We were talkingabout the current world monetary chaos, and one ofthem referred to the possible role played by themonetary system set up at Bretton Woods. I happen,ed to remark that when the conference was takingplace I was an editor on The New York Times, that Iwas writing nearly all its 'editorials on the BrettonWoods decisions as they were being daily reported,and that in them I was constantly calling attention tothe inflationary consequences those successive deci,sions would lead to.Both Mr. Koether and Mrs. Currier immediatelysuggested that it might serve a useful purpose toreprint some of these editorials now. I told them Ihad long ago sent my New York Times scrapbooks,together with other papers, to the George ArentsResearch Library in Syracuse University, and thatthe scrapbooks were the only place I knew of wherethese editorials had been identified as mine. GeorgeKoether undertook to make the trip to Syracuse,studied the scrapbooks, and sent me photostats of 26of them. The thoroughness of his research is shownby the fact that these included not only Timeseditorials of mine which qppeared between June 1,1944 and April 7, 1945, but one that was publishedon the virtues of the gold standard on July 9, 1934.His discrimination was such that I am confident he8


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did not miss a single essential comment. Of the 26editorials he sent, I am reprinting 23. I am greatly indebt to his selective judgment.I feel that these editorials do warrant republicationat this time, not to prove that my misgivings turnedout to be justified, but to show that if soundeconomic and monetary understanding had prevailedin 1945 at Bretton Woods, and in the American C o n ~gress and Administration, these inflationary c o n s e ~quences would have been recognized, and the BrettonWoods proposals rejected.When I began to r e ~ r e a d these old New York Timeseditorials I was reminded that I had summarized allthe misgivings expressed in them in an article in TheAmerican Scholar of Winter, 1944/5, under the title"The Coming Economic World Pattern: Free Tradeor State Domination?" I republish that here also.And once I had begun the briefhistory that follows ofthe actual workings of the Bretton Woods i n s t i t u ~tions, particularly The International Monetary Fund,I decided to include five other pieces: (1) excerptsfrom my book Will Dollars Save The World? which a p peared in 1947; (2) a column in Newsweek magazine ofOct. 3, 1949, on the devaluation of the British poundand t w e n t y ~ f i v e other world currencies in the twoweeks preceding; (3) my column for the Los AngelesTimes Syndicate, Nov. 21, 1967, "Collapse of aSystemj" (4) another column for the Los AngelesTimes Syndicate of March 23, 1969, "The ComingEconomic Collapse," which predicted that theUnited States would be forced off the gold standard-an event that actually took place on Aug. 15, 1971;and (5) an article in The Freeman, August, 1971, e n titled "World Inflation Factory," calling attention

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once more to "the inherent unsoundness of the Inter,national Monetary Fund system."All of these pieces and their predictions show thatthe monetary chaos and world inflation could havebeen stopped, or at least greatly diminished, in 1971,in 1969, in 1949, or even in 1944, if those inpositions of power had really understood what theywere doing and had combined that understandingwith even a minimum of political courage andresponsibility.I wish to express my thanks here to The New YorkTimes, The American Scholar, The Foundation for

Economic Education, Newsweek, The Los AngelesTimes Syndicate, and The Freeman for giving me per'mission to republish these articles.In my editorials for The New York Times, theunderstatement of the case against the defects of theBretton Woods agreements was deliberate, because Ihad always to bear in mind that I was writing not inmy own name but that of the newspaper. For one ex,a m p l e ~ in the effort not to seem "extreme", I lookedfor mitigating merits, and was far too kind to the pro'posed International Bank, simply because, unlike theFund, it was not called upon to make enormous loansautomatically, but allowed to exercise some discre'tion. The article setting it up even went so far as tostipulate that a committee selected by the Bank mustlearn whether a would,be borrower was "in a positionto meet its obligations!"Yet obvious as these dangers should have been,even in 1944, to those who botherea to read the textof the Bretton Woods agreements, I found myselfalmost alone, particularly in the journalistic world, incalling attention to them. (My editorials mentionedat the time the few persons and groups who did.)10


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Even today, nearly forty years later, and twelve yearsafter the agreements collapsed from their inherent in-firmities, we hear journalistic pleas for their restor-ation. Even the usually perceptive Wall Street Journalpublished an editorial as late as June 22, 1982, enti-tled "Bring Back Bretton Woods." It may be said inextenuation that the editorial writer was comparingthe situation in 1982, when inconvertible paper cur-rencies were daily depreciating nearly everywhere,with the comparatively stable exchange rates for the25 years before Bretton Woods openly collapsed in .August, 1971, when President Nixon closed theAmerican gold window. But The Wall Street Journalforgot that Bretton Woods worked as intended aslong as it did only by putting an excessive burden andresponsibility on one nation and one currency.Another and perhaps more typical example of the

confusion on this subject that still prevails in thejournalistic world today, appeared in a column byFlora Lewis in The New York Times of October 19,1982, entitled "A World Reserve Plan." She began bypraising the original Bretton Woods scheme as "a wayof admitting that nobody could go it alone and pros-per any longer." She then offered a complicated mis-explanation of what had gone wrong since then, andended by suggesting that the real trouble was thatPresident Reagan was preventing the InternationalMonetary Fund from lending even more billions toalready bankrupt debtors .

Let us, at the cost of repetition, remind ourselves ofwhat really went wrong. The Bretton Woodsagreements never seriously considered the return ofeach signatory nation to a gold standard. LordKeynes, their principal author, even boasted thatthey set up "the exact opposite of a gold standard." In

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any case, what Bretton Woods really set up was whatused to be called a "gold,exchange" standard. Everyother country in the scheme undertook simply tokeep its own currency unit convertible into dollars.The United States alone undertook (on the demandof foreign central banks) to keep its own currencyunit directly convertible into gold.Neither the politicians of foreign countries, norunfortunately of our own, realized the awesomeresponsibility that this scheme put on the Americanbanking and currency authorities to refrain from ex,cessive credit expansion. The result was that whenPresident Nixon closed the American gold windowon August 15, 1971, our gold reserves amounted toonly about 2 per cent of our outstanding currencyand demand and time bank deposits ($10,132 millionof gold vs. $454,500 million of M2). In other words,there was only $2.23 in gold to redeem every $100 ofpaper promises. But this takes no account of outstanding "Eurodollars," or even of the outstanding cur,rency and bank deposits of all the foreign signatoriesto Bretton Woods. The ultimate gold reserves onwhich the conversion burden could legally fall underthe system must have been only some small fractionof 1 per cent of the total paper obligations againstthem. Even if the American Congress, and our ownbanking and currency authorities, had acted far moreresponsibly, the original Bretton Woods system wasinherently impossible to maintain.A gold-exchange standard can be workable if only afew small countries resort to it. It cannot indefinitelyoperate when nearly all other countries try to dependon just one for ultimate gold convertibility.The Bretton Woods system continues to do great

harm because the dollar, though no longer based on12


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gold and itself depreciating, continues to be used (asof this writing) as the world's primary reserve c u r r e n ~cy, while the institutions it set up, like the I n t e r ~national Money Fund and the Bank, continue tomake immense new loans to irresponsible and i m provident governments.Let us now look chronologically at the worldmonetary developments of the last forty years. Therepresentatives' of some f o r t y ~ f i v e nations conferred atBretton Woods from July 1 to July 22, 1944, anddrafted Articles of Agreement. It was not untilDecember, 1945, that the required number of c o u n ~tries had ratified the agreements; and not until March1, 1947, that the International Monetary Fund (IMF),the chief institution set up by the agreements, beganfinancial operations at its headquarters inWashington, D. C.The ostensible purpose of the IMF was "to promote

international monetary cooperation." The chiefwayit was proposed to do this was to have all the membernations make a quota of their currencies available tobe loaned to those member countries "in temporarybalance of payment difficulties." The individual n a tions whose currencies were to be made availablewere not themselves to decide how large their loans tothe borrowing nations should be, nor the period forwhich the loans were to be made.This decision was and is, in fact, made by the i n t e r ~national bureaucrats who operate the IMF. Howthese officials decide that these balance of paymentproblems are merely "temporary" I do not know. Inany case, the "temporary" loans normally have runfrom one to three years. Until recently, the loanswere made almost automatically, at the request of theborrowing nation.

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It should be obvious on its face that this whole proJcedure is unsound. It is possible, of course, that anation could get into b a l a n c e J o f ~ p a y m e n t s difficultiesthrough no real fault of its own-because ofan e a r t h ~quake, a long drought, or being forced into anessentially defensive war. But most of the time,balanceJofJpayments difficulties are brought about byunsound policies on the part of the nation that suffersfrom them. These may consist of pegging its currencytoo high, encouraging its citizens or its own governJment to buy excessive imports; encouraging its unionsto fix domestic wage rates too high; enactingminimum wage rates; imposing excessive corporationor individual income taxes (destroying incentives toproduction and preventing the creation of sufficientcapital for investment); imposing price ceilings;undermining property rights; attempting toredistribute income; following other antiJcapitalisticpolicies; or even imposing outright socialism. Sincenearly every government today-particularly of"developing" countries:"-is practicing at least a few ofthese policies, it is not surprising that some of thesecountries will get into " b a l a n c e ~ f J p a y m e n t difJficulties" with others.A IIbalance-of-payments difficulty", in short, ismost often merely a symptom of a much wider andmore basic ailment. If nations with "balance-ofpayments" problems did not have a q u a s i ~ c h a r i t a b l eworld government institution to fall back on andwere obliged to resort to prudently managed privatebanks, domestic or foreign, to bail them out, theywould be forced to make drastic reforms in theirpolicies to obtain such loans. As it is, the IMF, in ef-fect, encourages them to continue their socialist andinflationist course. The IMF loans not only14


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encourage continued inflation in the borrowing c o u n ~tries, but themselves directly add to world inflation.(These loans, incidentally, are largely made at b e l o w ~market interest rates.)But the Fund has increased world inflation in stillanother way, not contemplated in the original A r tides ofAgreement of 1944. In 1970, it created a newcurrency, called "Special Drawing Rights" (SDRs).These SDRs were created out of thin air, by a strokeof the pen. They were created, according to theFund, "to meet a widespread concern that the growthof international liquidity might be inadequate" (AKeynesian euphemism for not enough paper money).

These SDRs, in the words of the IMF, wereallocated to m e m b e r s ~ a t their option-in p r o ~portion to their quotas over specified periods.During the first period, 1 9 7 0 ~ 7 2 , SDR 9.3 billionwas allocated. There were no further allocationsuntil January 1, 1979. Amounts ofSDR 4 billioneach were allocated on January 1, 1979, onJanuary 1, 1980, and January 1, 1981. SDRs inexistence now [April, 1982] total SDR 21.4billion, about 5 per cent of present internationaln o n ~ g o l d reserves.

In view of the ease with which this fiat world moneywas created, its limited volume (even though in excessof SDRs 20 billion) may strike many people as s u r p r i s ~ingly moderate. But its creation, as we shall see, setan ominous precedent.I should define more specifically just what an SDRis. From July, 1974, through December, 1980, theSDR was valued on the basis of the market exchangerate for a basket of the currencies of the 16 members

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with the largest exports of goods and services. SinceJanuary, 1981, the basket has been composed of thecurrencies of the five members with the largest ex,ports of goods and services. The currencies and theirweights in the basket are the U. S. dollar (42 percent), the deutsche mark (19 per cent), and the yen,French franc, and pound sterling (13 per cent each).The SDR serves as the official unit of account inkeeping the books of the IMF. It is designed, in thewords of the Fund, to "eventually become the prin,cipal asset of the international monetary system."But it is worth noting a few things about it. Itsvalue changes everyday in relation to the dollar andevery other national currency. (For example, onAugust 25, 1982, the SDR was valued at $1.099 andsix days later at $1.083.) More importantly, the SDR,composed of a basket of paper currencies, is itself apaper unit governed by a weighted average of infla,

tion in five countries and steadily depreciating inpurchasing power.A number of countries have pegged their currenciesto the SDR-Le., to a falling peg. Yet the IMF boasts

that it is still its policy "to reduce gradually themonetary role of gold," and proudly points out thatfrom 1975 to 1980 it sold 50 million ounces of gold-athird of its 1975 holdings. The U.S. Treasury Depart'ment can make a similar boast. What neither theFund nor the American Treasury bother to point outis that this gold has an enormously higher value to,day than at the time the sales were made. The profithas gone to world speculators and other privatepersons. The American and, in part, the foreign tax,payer has lost again.To resume the history of the Bretton Woodsagreements and the IMF: Because the Fund was

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created on completely mistaken assumptions regarding what was wrong and what was needed, its loanswent wrong from the very beginning. It began operations on March 1, 1947. In a book published thatyear, Will Dollars Save the World*, I was already pointing out (pp. 81-82) that:The [International Monetary] Fund in its present form ought not to exist at all. Its managersare virtually without power to insist on internal

fiscal and economic reforms before they granttheir credits. A $25 million credit granted by thefund to France, for example, is being used tokeep the franc far above its real purchasingpower and at a level that encourages imports anddiscourages exports. This merely prolongs theunbalance ofFrench trade and creates a need forstill more loans. Such a use of the resoUrces ofthe Fund not only fails to do any good, but doespositive harm.This loan and its consequences were typical. Yet

on Dec. 18, 1946, the IMF contended that the tradedeficits of European countries "would not beappreciably narrowed by changes in theircurrency parities."The countries themselves finally decided otherwise.On Sept. 18, 1949, precisely to restore its tradebalance and "to earn the dollars we need," thegovernment ofGreat Britain slashed the par value ofthe pound overnight from $4.03 to $2.80. Within asingle week twenty-five nations followed its example

*The Foundation for Economic Education, Irvington-on-Hudson,New York. A 6500 word condensation of it was also published inthe January, 1948 issue of The Reader's Digest and in all its for-eign issues of that month.17


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was largely the existence of the IMF and its misguidedlending that had encouraged a continuance of p e r ~nicious economic policies on the part of individualnations-and still does.Let us now take another jump forward in ourhistory. In a column published on March 23, 1969,"The Coming Monetary Collapse", I predicted that:"The international monetary system set up at BrettonWoods in 1944 is on the verge of breaking down,"and "one of these days the United States will be o p e n ~ly forced to refuse to payout any more of its gold at$35 an ounce even to foreign central banks." This a c tually occurred t w o ~ a n d ~ a ~ h a l f years later, on Aug.15, 1971.The fulfillment of this prophecy did not mean that Iwas the seventh son of a seventh son. I simply

pointed in detail to the conditions already existing inMarch, 1969, that made this outcome inevitable. Butnext to no one in authority was paying or calling anyattention to these conditions-no one except anegligible few.Since the United States went off gold, and some ofthe results have become evident, most of the blamefor that action (on the part of those who alreadybelieved in the gold standard or have since becomeconverted to it) has been put on President Nixon,who made the announcement. He doubtless deservessome of that blame. But the major culprits are thosewho set up the Bretton Woods system and those whoso uncritically accepted it. No single nation's c u r r e n ~cy could long be expected to hold up the value of allthe currencies ofthe world. Even if the United Stateshad itself pursued a far less inflationary policy in thet w e n t y ~ s e v e n years from 1944 to 1971, it could not beexpected indefinitely to subsidize, through the IMF,18


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had itself pursued a far less inflationary policy in thetwenty-seven years from 1944 to 1971, it could not beexpected indefinitely to subsidize, through the IMF,the International Bank, and gold conversion, theinflations of other countries. The world dollarexchange system was inherently brittle, and it broke.So today we have depreciating inconvertible papercurrencies all over the world, an unprecedented situation that has already caused appalling anxiety andhuman misery. Yet the supreme irony is that theBretton Woods institutions that have failed so completely in their announced purpose, and led to onlymonetary chaos instead, are still there, still operating,still draining the countries with lower inflations tosubsidize the higher inflations of others.Yet to describe exactly what the IMF has done upto the present moment is not easy to do in nontechnical terms. The Fund has its own jargon. Itsbooks are kept in Special Drawing Rights (SDRs)which are artificial entries and nobody's pocketmoney. Its loans are seldom called loans but "purchases," because a country uses its own money unit to"buy," through the IMF, SDRs, dollars, or any othernational currencies. Repayments to the Fund arecalled "repurchases of purchases."So, as of Sept. 30, 1982, total purchases, including"reserve tranche" purchases, on the IMF's bookssince it began operations have amounted to SDR66,567 million (U.S. $71,879 million). Again, as ofSept. 30, 1982, total repurchases of purchasesamounted to SDR 36,744 million.The total amount of loans outstanding as of Sept.30, 1982, was SDR 16,697 million (U.S. $18,020

million). The leading half-dozen borrowers were: India, SDR 1,766 million; Yugoslavia, SDR 1,46919


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million; Turkey, SDR 1,346 million; South Korea,SDR 1,148 million; Pakistan, SDR 1,079 million; andthe Philippines, SDR 780 million-a total of SDR7,588 million or $8,193 million in U.S. currency.

The future, of course, can only be guessed at, but theoutlook is ominous. A sobering glance ahead was pub,lished in The New York Times of Jan. 9, 1983. TheIMF's total outstanding loans had then risen to $21billion. The executive directors of the Fund had justapproved a $3.9 billion loan designed as an emergencybailout of the near bankrupt Mexico. The Fund hadalso agreed to a similar package for Argentina. One forBrazil had been almost completed. Lined up for furtherhelp from the Fund, which already had loans out tothirty,three hard,pressed countries, were Chile, thePhilippines, and Portugal.Many had feared in the fall of 1982 that Mexicowould simply refuse to make payments on its $85

billion foreign debt, thereby creating an even worseinternational financial crisis. So the ManagingDirector of the IMF, the Frenchman Jacques deL a r o s i ~ r e , before making the loan, warned the privatebanks that had already lent billions to Mexico thatunless they came up with more, they might findthemselves with nothing at all. He met a delegationrepresenting 1,400 commercial banks with loans outto Mexico. Before one additional cent would be putup by the IMF, he told them, the private banks wouldhave to roll over $20 billion of their credits to Mexicomaturing between August, 1982, and the end of 1984,and extend $5 billion in fresh loans. Similar con,ditions were later attached to the Fund's loans toArgentina and Brazil.So the IMF is now using its loans as leverage toforce the extension of old and the making of new

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private loans. All this may seem momentarilyreassuring. At least it tries to put the main part of thefuture burden and risk on the imprudent past privatelenders (and their creditors in turn) rather than onthe world's taxpayers and national currency holders.But what is all this leading to? May it not consistmerely of throwing good money after bad? How longcan the international jugglers keep the mounting un,paid debt in the air?They cannot be blamed for not making a new try.On Jan. 17, 1983, senior monetary officials from 10major industrial nations (the Group of 10, formed in1962) agreed to make available a $20 billion emergen,cy fund to help deeply indebted countries. Asreported in The New York Times of Jan. 18, 1983:

The new fund is to be established by triplingthe Group of lO's current commitment to lendthe IMF an additional $7 billion whenever itruns short of money and by relaxing the rulesunder which this aid is provided. ... Major in,dustrial governments also plan to increase theIMF's own lendable capital this year by about 50per cent, to $90 billion. The governmentauthorities hope that private hanks then wouldalso help these countries by agreeing to delaydebt payments and providing more credit so thepoorer countries would not be forced to curb im,ports and thus deepen the world recession.Thus, the rescuing governments plan to throw stillmore money at near,bankrupt countries to encouragethem to continue the very policies of over,spending

that brought on their predicament.In an editorial on January 25, 1983, The Wall StreetJournal commented: "What started out as a relatively

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modest effort to increase international monetaryreserves is turning into an a l l ~ o u t assault onthe U.S. Treasury-led by the Secretary of theTreasury himself."The prospect is made even more disturbing when

one looks about in vain among the world's statesmenor putative financial leaders for anyone with a clearproposal for bringing the increasing expansion ofcredit to an end. The present American Secretary ofthe Treasury, Donald T. Regan, for example, isreported to be "worried that too much IMF inducedausterity could bring about even sharper contractionsin world economic activity".And among the influential politicians in office

today he is not alone, but typical. In 1971, whenPresident Nixon was imposing wage and price c o n ~troIs, he said: "We are all Keynesians now." He wasnot far wrong. Even politicians who do not considerthemselves inflationists are afraid to advocate b r i n g ~ing inflation to a halt. They merely recommendslowing down the rate. But doing this would at bestprolong and increase depression where it already e x ists and prolong and increase the consequentunemployment. It would be like trying to reduce aman's pain by cutting offhis gangrenous leg a little bitat a time.In order for inflation, once begun, to contillUe h a v ~ing any stimulative effect, its pace must be constantlyaccelerated. Prices and purchases must turn out to behigher than expected. The only course for a g o v e r n ~ment that has begun inflating, if it hopes to avoidh y p e r ~ i n f l a t i o n and a final " c r a c k ~ u p boom", is tostop inflating completely, to balance its budgetwithout delay, and to make sure its citizens u n d e r ~stand that this is what it is doing.22


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This wouldsof courses bring a crisissbut much lessnet damage than a policy of gradualism. As theNobel laureate F. A. Hayek said recently* in recom,mending a similar course: "The. choices are 20 percent unemployment for six months or 10 per cent un'employment for three years. t) I cannot vouch for hisexact percentage and time,span guessess but they il,lustrate the kind of alternative involved in the choice.To resume our history: On Feb. 12 s 1983 s the IMFapproved an increase in its lending resources of 47.4

per cent to a total of $98.9 billions the largest increaseproposed in its history.Some commentators began pointing out that theIMF was already holding gold at a market value ofbetween $40 and $50 billions second only to theholdings of the U.S. government, and suggested itmight start selling off some of this gold to raise themoney to make its intended new loans.On April 4, William E. Simon, the former U.S.Secretary of the Treasury, now free to express his per,sonal opinion frankly, wrote in an article in

The Wall Street Journal:We are witnessing the tragic spectacle of thedeficit,ridden rescuing the bankrupt with anoutpouring of more American red ink-and thetaxpayer is left holding the bag....By extendingcredit to countries beyond their ability to repay,

the final bankruptcy is worse....There is no pointto a bailout that increases world debt when theproblem is too much indebtedness already.Countries are in trouble because they cannotservice their current obligations. The strain on

*Interview in Silver and Gold Report, end of December, 1982.(P.O.Box 325, Newtown, Conn. 06470)23


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them is not eased by a bailout that loads them upwith more.I may add my own comment that g o v e r n m e n t ~ t o ~government loans made through an internationalpool reverse all normal incentives. These loans gomainly to the countries that have got themselves intotrouble by following wasteful and a n t i ~ c a p i t a l i s t i cpolicies-policies which the loans themselves then e n courage and enable them to continue.When governments are obliged to turn to private

lenders, the latter will usually insist on policies by theborrowing governments that will enable the loans tobe repaid. There has recently been an outbreak ofjustifiable criticism of private banks for making i m provident loans to Third World countries. What hasbeen until very recently overlooked is that it is p r e ~cisely because these private banks have been countingon the IMF to bail them out in case of default that agreat part of these dubious loans were made."On May 9, 1983, President Mitterrand of Francecalled for a conference "at the highest level" toreorganize the world monetary system. "The time hasreally come," he said, "to think in terms of a newBretton Woods." He forgot that it was preciselybecause under the old Bretton Woods system

American gold reserves were drawn upon and wasted,among other things to keep the paper franc far aboveits market level, that the system broke down. Only areturn to a genuine international gold standard (andnot a pretence of one accompanied by a multitude ofnational inflations) can bring lasting worldcurrency stability.On June 8 the Senate approved the bill to increase

the IMP's lending resources by a total of $43 billion,24


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with an increase of $8.4 billion in the contribution ofthe U.S. On August 3 the House passed a similar bill,with more restrictive amendments. But CongressmenRon Paul of Texas declared: "The total U.S. commit-ment in H.R. 2957 is about $25 billion, not merely the$8.4 billion for the IMF, as one might be led to believeby the press."But even before the bill was passed, some interna-tional bankers were predicting that the additional ap-propriation would not be enough. On Nov. 18, 1983,in the last day of its session, Congress finally passed acompromise bill, along with a slue of other legislation,increasing the American contribution to the IMF by$8.4 million. But it attached an irrelevant rider autho-rizing $15.6 billion for subsidized housing programs, sothat the President would be forced to approve this ex-penditure also.Let us take a look at the international debt situa-tion as it stands at the moment of writing this. Thedemand for increased lending by the IMF and otherinstitutions arose in the fall of 1982 because of thehuge debts of Mexico, Argentina and other LatinAmerican countries. In the twelve months following,commercial banks around the world renegotiatedrepayment terms for $90 billion worth of debt owed

by fifteen countries. This was twenty times morethan the amount restructured in any previous year,according to a study by the Group ofThirty, an inter-national economic research body. Yet on Sept. 5,1983, The New York Times published the followingtable:

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Latin America's Debt

In billions of dollars

ArgentinaBrazilChileColombiaEcuadorMexicoPeruVenezuela

TotalDebt$36.586.317.210.56.784.611.632.6

DebtOwedU.S.Banks

$8.622.05.93.72.124.32.411.2

Source: Morgan Guaranty Trust Company

The world cannot get back to economic sanity untilthe IHF is abolished. So long as it stands ready to makemore bad loans, near;bankrupt countries will continueto go into further debt.

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The Bretton Woods agreements, drafted in 1944, andthe International Monetary Fund set up by them, werenot the sole causes of the present world inflation. Butthey constituted a major contribution. They were builton the assumption that inflation-the continuous ex,pansion of international paper credit, and the contin,uous making of loans by an internationalgovernmental institution-were the proper and neces,sary ways to "promote world economic growth." Thisassumption was disastrously false, We will not stop thegrowth of world inflation and world socialism until theinstitutions and policies adopted to promote themhave been abolished.

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Part IBirth of the Bretton Woods System


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Hopes had been raised ten years earlier, but the BrettonWoods agreement never seriously considered the return ofeach signatory nation to the gold standard.


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1

The Return toGoldJuly 9, 1934

The presence at Basle of Governor Harrison of theNew York Federal Reserve Bank is a favorable sign,particularly when we learn that he has been confer,ring there with Governor Norman of the Bank ofEngland. Whether the two have been discussing thestabilization of the pound and the dollar, or the even,tual return of both to a fixed gold standard, willprobably remain for the present in the realm of con,jecture. The knowledge that that problem was at lastbeing dealt with, however, would be extremelyheartening. We can hardly expect a vigorous and.continued world recovery so long as the two principalworld currencies remain subject to fluctuationand uncertainty.The view is sometimes expressed that the UnitedStates has already returned to the gold standard. It isa very equivocal gold currency, however, that can bechanged in value overnight by nearly 15 per cent atthe decision of one man. Our Government couldreturn to a genuine fixed gold standard acting alone.But announcement of such a plan would not havehalf the immediate buoyant effect on world con,fidence that a joint announcement by the two great

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English speaking countries would have. The latterwould not only restore stability to the two majorunits of value, but would symbolize a return tointernational collaboration in a world that hasbeen drifting steadily toward a more and moreintense nationalism.One cause for hope of an early agreement is thatmany of the illusions concerning the advantage ofdrifting currencies and competitive depreciation havebeen dissolving under the test of experience. Great

increases in export trade have not followed deprecia,tion; the usual result of anchorless currencies hasbeen a shrinkage of both export and import trade.Again, the fallacy is beginning to be apparent of theidea that a currency allowed to drift would finally"seek its own natural level." It is becoming clear thatthe "natural" level of a currency is precisely whatgovernmental policies in the long run tend to make it.There is no more a "natural value" for an ir'redeemable currency than there is for a promissorynote of a person of uncertain intentions to pay an un,disclosed sum at an unspecified date. Finally, it hasbeen learned that competitive depreciation, unlikecompetitive armaments, is a game that no Govern,ment is too poor or too weak to play, and that it canlead to nothing but general demoralization.

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2

For Stable ExchangesJune 1, 1944

The United Nations Monetary and Financial Con-ference called by the President will meet a monthfrom today. Its purpose is the highly desirable one ofsecuring stable exchange rates in the post-war world.But the recent proposal for an $8,000,000,000 International Stabilization Fund misconceives the natureof the problem and approaches it from the wrongend. Essentially it seeks to fix the value of eachnation's currency unit in relation to the others by arranging to have the fund buy the weak currencies andto sell the strong currencies at the parities fixed. It isobvious that a weak currency will drop to its truemarket value as soon as such purchases cease. Aslong, however, as the purchases continue, the nationswith strong currencies will be subsidizing the nationswith weak currencies (or at least the private holders ofthose currencies), and thereby subsidizing also the internal economic policies, whatever they may happento be, of the nations with weak currencies. TheUnited States, as the chief contribl,ltor to the fund,would be the chief loser; but the money that it pouredout in this way might not only fail to help worldrecovery but, by prolonging unsound policies within

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the nations whose currencies could only be held upby such purchases, might actually do harm.The true solution of this problem would begin atthe other end. It would seek to make currenciessound within each country. If each nation can m a i n ~tain the integrity of its own currency, if each nationkeeps its own monetary unit at par, then the problemof maintaining a stable relationship between differentcurrencies will solve itself. The true object of theforthcoming monetary conference, therefore, should

be to lay down the principles and explore themethods by which this can be done.The broad principles should not be difficult to f o r ~mulate. One requirement for a stable currency is that

it be redeemable in something that is itself fixed anddefinite: for all practical purposes this means a returnto the historic gold standard. Another requirementfor a stable currency is a balanced budget. A thirdrequirement is that Governments refrain from c u r ~rency and credit inflation. A fourth is a removal of,or at least a great reduction in, the p r e ~ w a r barriers tointernational trade-tariffs, quotas, exchange r e s t r i c ~tions, and all the rest.These requirements form a unit. If one of them isviolated it will be difficult, if not impossible, to fulfillthe others. Thus if a nation's budget is chronicallyunbalanced it is practically compelled to resort to b o r ~rowing through currency or credit inflation to makeup the difference. When it does this it underminesfaith in its currency unit and cannot maintain goldpayments. Officials of the Government then say thatthe gold standard "has broken down," when theyreally mean that their own policies have broken it.There will be grave problems after the war foralmost every nation fixing a new currency parity at a36


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level where it can be held. But the belief that only arich nation can afford a gold standard is a fallacy. AsViscount Goschen, one of England's ablestChancellors of the Exchequer, once said: "Ourpowers of obtaining gold would only be exhaustedwhen the country had nothing left to sell."The greatest single contribution the United Statescould make to world currency stability after the war isto announce its determination to stabilize its own c u r ~rency. It will incidentally help us, of course, if other

nations as well return to the gold standard. They willdo it, however, only to the extent that they recognizethat they are doing it not primarily as a favor to usbut to themselves.

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The agreement provided in advance for a uniform d e v a l ~uation in the gold value ofmember currencies. This d e l i b e r ~ately sanctioned future world inflation.


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3

For World Inflation?June 24, 1944

In the statement of principles for the proposedInternational Stabilization Fund is this shortparagraph:An agreed uniform change may be made in the

gold value ofmember currencies provided everymember country having 10 per cent or more ofthe aggregate quotas approves.This is a provision which would permit world infla,tion. Experience has shown that it is extremely

unlikely that any Government will wish to raise theunit gold value of its currency, thereby bringingabout an internal drop in prices or wages. Thepolitical pressures from time immemorial, and par,ticularly in the last three decades, have been in thedirection of devaluation and inflation. There are fewcountries in which the most vociferous pressuregroups are not in favor, at almost any time, ofdevaluation or inflation that would raise farm pricesor wage rates, or remove unemployment caused bywage rates too high in relation to the existing pricelevel, or to relieve debtors, particularly the Govern,

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ment itself, which will be urged to write down theburden of its internal debt by the device of inflation.A provision for uniform inflation in all major coun,tries would increase the temptation to inflate in eachcountry by removing some immediate penalties.When the currency of a single country begins to sagbecause of inflationary policies, two embarrassingresults follow. One is the i m m e d ~ a t e loss of gold,unless the Government prohibits its export (whichmakes the currency sag more); the other is thehumiliation of seeing the country's currency quotedat a discount in other nations. A uniform inflation inthe world's most important countries would avoidboth of these embarrassments.But the real evils of inflation would remain. Per'

sons with fixed salaries or wages would see theirpurchasing power shrink. Pensioners would see thepurchasing power of their pensions shrink. Holdersof Government bonds, often bought for purelypatriotic reasons, would see the purchasing power oftheir capital and interest shrink. Capital in the formof bonds or mortgages would be much harder to bor,row; and, therefore, many buildings would not beerected and many enterprises would not be started,because of the prospect of this inflation.

It would be difficult to think of a more seriousthreat to world stability and full production than thecontinual prospect of a uniform world inflation towhich the politicians of every country would be soeasily tempted.

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The agreement provided that any country could reducethe par value of its currency whenever this was necessaryto correct a "fundamental disequilibrium", and that theproposed International Monetary Fund should not rejectsuch a proposal. "Fundamental disequilibrium" was notdefined. No limit was put on the number of these reduc'dons of parity provided they were individually 10 per centor less. After having had its currency accepted at par byother members, any member country could withdraw fromthe Fund at any time, provided it gave notice in writing.No time period was specified for how long in advance suchnotice was required.

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4

How Will It Stabilize?June 26, 1944

One of the ostensible objects of the proposed Inter-national Stabilization Fund is "to promote exchangestability." The more the "statement of principles" forthe fund is examined, however, the more difficult itbecomes to find exchange stability in it. It provides,indeed, that when any nation enters the fund a parvalue for its currency shall be fixed or stated; but thiscan apparently be changed at any time. A membercountry may propose a change in the par value of itscurrency, for example, if it considers such a change"appropriate to the correction of a fundamental dis-equilibrium." A "fundamental disequilibrium" is notdefined in the statement. No country that wishes todevaluate should find great difficulty in arguing thatit wishes to do so to correct a "fundamental dis-equilibrium."The statement of principles continues:The fund shall approve a requested change inthe par value of a member's currency if it isessential to the correction of a fundamental dis-equilibrium. In particular the fund shall not re-ject a requested change, necessary to restore

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equilibrium, because of the domestic, social orpolitical policies of the country applying for achange.In other words, the nations which have been sup-porting that country's currency cannot reject a

devaluation merely because the "fundamental dis-equilibrium" complained of has been the direct resultof unsound internal policies.The statement of principles provides that a member

country may reduce the established parity of its cur-rency by 10 per cent. "In the case of application for afurther change, not covered by the above and not ex-ceeding 10 per cent, the fund shall give its decisionwithin two days of receiving the application, if the ap-plicant so requests." This is a little ambiguous butseems to imply that a nation can devalue a further 10per cent with the consent of the fund. Suppose thenation wishes to devaluate still further? This seems tobe provided for under Section VIII, Paragraph 1: "Amember country may withdraw from the fund by giv-ing notice in writing." The length ofthe notice is notspecified: apparently the member country'swithdrawal could take place immediately after thenotice was received.In other words, while under the plan the net

creditor nations pledge themselves through their con-tributions to the fund to buy each net debtor membernation's currency to keep it at parity, they have noassurance that the value of these currency holdingswill not suddenly shrink through a sudden act ofdevaluation on the part of the nations whose curren-cies they hold.

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The guiding idea of the conference, even at its opening,was that the value of the weak currencies should be main-tained by the countries with strong currencies agreeing tobuy them at a fixed rate, regardless of their market value.This could only weaken the strong currencies. The onereal cure was disregarded: to encourage each country to re-frain from inflation and to maintain the integrity of its ownmonetary unit.


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5The Monetary

ConferenceJuly 1, 1944

Today the representatives of more than forty na,tions will gather at Bretton Woods to open amonetary conference. In several respects the con,ference will get off to an unfortunate start. Importantas the problem of stable exchanges and worldmonetary soundness is, it would be impossible to im,agine a more difficult tiine for individual nations todecide at what level they can fix and stabilize their na-tional currency unit. How could the representativesof France, of Holland, of Greece, ofChina, make anybut the wildest guess at this moment of the point atwhich they could hope to stabilize? This problem ex,ists on a world'wide scale to a greater extent than everbefore in history.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 misconceivesthe nature of the problem to be solved and thereforeattempts to solve it from the wrong end. It proposesthat each nation shall adopt a par value for its curren-cy that the other nations shall accept; that the na,tions shall put gold or their own paper currencies intoa common pool, and that the resources of that pool

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shall be used to try to keep each currency at par by acommitment to buy the weak currencies with thestrong currencies. The fund is not to exercise any realcontrol, however, over the internal policies of thecountries with the weak currencies.It is obvious that such a plan could maintain eventhe outward appearance of success only for a shorttime. It is possible, of course, to keep a valuelesscurrency at any arbitrarily chosen level by a commitment to pay that price for it, just as it is possible tokeep a worthless stock at $100 a share by buying atthat price all of the stock that is offered for sale. Butwhen the allotted resources of the buyer run out, thecurrency or the stock will immediately drop to itsnatural level, and the buyer will find himself holdingjust that much worthless paper. The plan becomesparticularly unrealistic when each nation can turnout unlimited amounts of its own currency on its ownprinting presses-with the incentive, which it doesnot ordinarily have, of a buyer at a fixed price. Itseems probable that the plan could only lead to ahuge waste of funds and to a temporary world inflation with a subsequent collapse.On the positive side, what could and should bedone at the Bretton Woods conference? Much wouldbe gained by an agreement on certain fundamental

principles. The first essential is a determination tomake currencies sound within each country. TheUnited States is in a position to take the leadership.The most important contribution that this countrycould make to world currency stability would be todeclare unequivocally its determination to stabilize itsown currency. It could do this by announcing itsdetermination to balance its budget at the earliestpracticable moment after the war, and by announc-48


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ing that the dollar would no longer be on a"twenty,four" hour basis, and subject to every rumor,but firmly anchored to a fixed quantity of gold. Thisnation would also have to make clear that it was will,ing to take the initiative in lowering its own tariffbar'riers, whether or not other nations were willing tofollow, and that we for our part would refrain fromimport quotas and exchange restrictions. Even if weadopted such a program only partially it would be ofimmense help. We could then urge other countries tofollow our example, not for our benefit, but for theirown.It is true that the present fashionable fiscal theoriesstand in the way of such primary reforms. But theUnited States will hold one great inducement forsecuring them. Most other countries will need help inreturning to a sound currency and sound internalpolicies. We are in a position to supply it. We can of,

fer moderate gold loans in return for such reforms.The reforms would not only be in the direct interestof the nations making them, but not unless they weremade would our loans have a reasonable prospectof repayment.So far as possible, the loans should be made byAmerican private investors, who, through theirrepresentatives, would be in a much better positiondiplomatically to insist on sound policies within theborrowing nation than our own Government wouldbe. But for a limited period of years, and solely forstabilization loans, there may be an advantage in hav'ing Government participation, either on some suchbasis as that of FHA mortgages or by the Govern,ment taking 5 or 10 per cent of individual loans.Government participation of this sort might increaseboth the volume of such loans and the promptness

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with which they were placed, at the same time as thedominant private interest would take the loans out ofthe dangerous political field and assure that theywere made on business principles and withadequate guarantees.But any machinery that is set up will be of secon'dary importance for world recovery compared withideological reforms. Each nation should abandon the

fallacious idea that it is to its own advantage to inflateor devaluate, or that it gains when it erects huge tariffbarriers or subsidizes exports or blocks its currency,or when it forbids its own citizens to export gold,capital, or credit. Each nation should abandon thefallacious idea, in short, that it gains when it makeseconomic war on its neighbor.

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Nearly every nation represented at Bretton Woodssought to increase its "quota" in the Fund, because thismeant not what each one would have to put into the Fundbut what it hoped to draw out. On the basis of this quota itcould "buy" currencies of real value-meaning, in themain, American dollars-to twice the amount of its quota.This could encourage inflation in such countries and provevery expensive-and wasteful- for the United States.


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6

Results at BrettonWoods

July 18, 1944

Genuine international economic cooperation afterthe war will be possible only if there is a profoundchange from the ideology of the Thirties. Nationsmust learn that their own economic salvation is notto be attained by making economic war upon theirneighbors. They must learn that prohibitive tariffs,import quotas, competitive depreciation, exchangecontrols, blocked currencies, restrictions on capitalexport, are the road to economic disaster. The returnof international peace and prosperity will be possibleonly if these devices are abandoned and if the neomercantilist fallacies that give rise to them are abandoned also. To achieve this international cooperation will require not only generosity and goodwill onour par but, above all, clarity of thought.The Administration has shown the good-will and

the generosity. These have reflected themselves insuch an indispensable institution as UNRRA[United Nations Relief and Rehabilitation Administration]. Unfortunately, in the proposals thatthe Administration has sponsored at Bretton Woodsit has failed to show clarity of thought. The result is a

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plan confused in its objectives and hazardous in itspossibilities.

The delegates at Bretton Woods-above all, theAmerican delegates-seem to be obsessed by the ideaof machinery. They act as if international economiccooperation could be achieved only by setting upsome elaborate organization, with funds and quotasand votes and rules and whereases, and as if the mereexistence of such machinery in itself constituted asolution of the problem. In their determined effortsto secure agreement on the superficial problems ofmachinery they have failed to secure or even to seekagreement on the really basic problem of principles.

The key to the kind of organization they have beensetting up can be found in the struggle of nearly everynation to increase its "quota" in the fund. For this"quota", apart from that of the United States,represents fundamentally not what each nation putsinto the fund but what it hopes to take out of it .. Thereal assets of the fund will consist of its gold and ofwhatever currencies are reliably convertible into goldor even into wanted goods. But each country willmake a maximum contribution in gold of only 25 percent of its quota, and in many cases the percentagec ontribution in gold will be far below that. For therest it can throw in its own paper money, valued at anarbitrary figure, whether or not it is convertible intogold or represents anything but the product of theprinting press. O n the basis of this quota it can "buy"currencies of real value-meaning in the mainAmerican dollars-to twice the amount of its quota.In simpler terms, by putting in a very small quantity

in gold, a country can borrow many times thatamount in dollars or other valuable currencies. Instill simpler terms, this means that America agrees in54


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advance to lend each ofmore than forty other coun,tries up to a certain fixed amount of dollars, whetheror not there is any reasonable prospect of repayment,and regardless of the internal economic policies ofeach country or what it does with the money. Thisnot only means that we can lose many dollars in badloans, but, what is more important, that as long ascredit is available to nations under these easy condi-tions they will postpone unpleasant but essentialeconomic reforms.What is needed above all is an agreement on soundprinciples. Through UNRRA we should give to the

former occupied countries promptly and generouslywhatever is needed to relieve hunger and distress.Humanitarian gifts, however, should not be confusedwith business loans. No loan should be automatic inamount or made without conditions. It should begranted only where there is real prospect of repay'ment, and only on consideration of the adoption ofsound internal economic policies in each borrowingcountry. America, as the strongest financial countryin the world, could not in consistency impose condi,tions and principles that it was unwilling to adoptfirst of all for itself. The greatest contribution thatAmerica can make to international cooperation is totake the lead in removing excessive barriers againstimports, in announcing a determination to haltdeficit financing and to balance the budget as soon aspossible after the war, and in revealing a determina-tion to stabilize the dollar in terms of a fixed quantityof gold. That policy, in turn, would supply not onlyan example but an anchor for other currencies.

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Because Lord Keynes thought it "worse than a mistaketo attempt the invidious task of discriminating betweenmembers and assessing their credit worthiness," bad bor-rowers with bad records and bad internal policies were toget loans from the Fund and the Bank on the same termsas good borrowers with the best records and sound internalpolicies-thus assuring a further loss and waste of scarceworld capital.


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7AnInternational Bank?

July 19, 1944

The drive for a $10,000,000,000 InternationalBankfor Reconstruction and Development illustrates oncemore the fetish ofmachinery that possesses the mindsof the governmental delegates at Bretton Woods. Likethe proposed $8,800,000,000 International MonetaryFund, it rests on the assumption that nothing will bedone right unless a grandiose formal i n t e r g o v e r n m e n ~tal institution is set up to do it. It assumes thatnothing will be run well unless Governments run it.One institution is to be piled upon another, eventhough their functions duplicate each other. Thus theproposed Fund is clearly a lending institution, by w h a t ~ever name it may be called; its purpose is to bolsterweak currencies by loans of strong currencies.One of the difficulties being experienced in the f o r ~mation of the Bank, however, is the opposite of thatfound in the formation of the Fund, and serves to i l lustrate the real nature of the latter. Nations thatwere fighting for the largest possible quotas in the

Fund are fighting for the smallest possible s u b s c r i p ~tions to the Bank. That is because the Fund quotas atbottom represented potential borrowing, whereas theBank subscriptions represent potential lending or57


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losses. It is after the Bank has been set up, and the ap'plications for loans come in, that various nations willagain seek the maximum amounts.Under a free world economy, with private lendersrisking their own funds and borrowers seeking tomeet their requirements, loans would go to the coun,tries and projects that offered the most attractiveterms commensurate with the best prospect of repay'ment. This means, in general, that capital would gointo the countries providing the soundest conditionsand into projects promising the greatest economicsuccess. Under such conditions there is themaximum development of world productivity in pro,portion to the capital invested.These conditions hardly seem likely to be filled,however, under the proposed international bank planas envisaged by its framers. Lord Keynes has pro,posed that the commission to be paid by borrowersshould be the same for all members, as it would be"worse than a mistake to attempt the invidious task ofdiscriminating between members and assessing theircredit,worthiness." This seems to mean that bad bor,rowers with bad records and bad internal policies areto pay interest rates no higher than good borrowerswith the best records and sound internal policies.When the criterion of credit,worthiness is dismissedas "invidious, I I moreover, the implication is thatloans themselves are to be made without regard to it.Under such conditions the proportion of bad loansand vf defaults seems certain to be high, and muchcapital, in a world already faced by grave shortages, islikely to be dissipated in ill,advised enterprises.This brings us to the proposed nature of the Bank

itself. It would be apparently a bank that"guaranteed" loans made by private investors instead58


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of making loans directly itself. But if this guaranteefully covered both capital and interest, then theprivate investors making the loan would not have toexercise any care or discrimination on their own ac,count. They would have to conform merely with therequirements of the Bank, which would assume allthe losses and risks without having the privilege ofdirectly making the loans. The member Govern,ments acting as directors of the Bank would also bethe. chief borrowers from the Bank.

Many questions of practical operation also arise.Suppose nation X defaults on its share of the loan.Suppose nation Y then defaults on its share of theguarantee. Who is to guarantee the guarantors? Willthe subscriptions to the Bank be in gold, or wholly ormainly in each nation's currency, convertible or in,convertible? Will each nation meet its share of theguarantee merely in its own currency, which mayhave greatly shrunk in value?World economic revival will not necessarily flowfrom a plan under which taxpayers are saddled bytheir own Governments with losses from huge foreignloans made regardless of their soundness. It is likely,rather, to flow from a situation in which each coun,try, or each industrial venture in it, is encouraged orforced to follow sound policies in order to attractforeign investors.

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The Monetary Fund, as set up, I believedwould lead tothe opposite of its declared purposes. One of thosedeclared purposes, for example, was "to promote exchangestability," but the specific provisions for the Fund not onlypermitted but encouraged internal inflation, devaluationand exchange instability.


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8

The Monetary FundJuly 24, 1944

The final text of the articles of agreement of the pro,posed International Monetary Fund differs very little,except in the elaboration of details, from the proposalsubmitted before the conference met. In view of theinstructions of the President to the American delega,tion, this is not surprising. In a letter to SecretaryMorgenthau, the United States delegation chairman,on June 9, Mr. Roosevelt wrote: "You and the otherdelegates will be expected to adhere to the joint state,ment of principles of an international monetary fundannounced April 21, 1944. You ...are authorized ...toagree to modifications...provided that such modifica,dons do not fundamentally alter the principles setforth in the joint statement." These instructions wereunfortunate. They prevented the very discussion of,basic principles that was most essential, and madethe conference, in effect, a rubber stamp which didlittle more than endorse the previous work ofthe technicians.The result is that the final agreement meets none ofthe fundamental criticisms that applied to the ten,

tative agreement. A vast machinery is providedwhich is confused in its objectives. One of the six61


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declared purposes of the Fund is "to promote ex,change stability." But again and again provisions areincluded to promote instability. The Fund is notallowed to raise any objection if a nation devalues itscurrency by 10 per cent. It must give an answerwithin three days if the nation wants to devalue a fur,ther 10 per cent. It must concur in practically anyproposed devaluation if the change is necessary "tocorrect a fundamental disequilibrium." It is notallowed to object to a proposed devaluation "becauseof the domestic, social or political policies of themember proposing" the devaluation. In other words,the Fund cannot criticize internal policies even if theyare the direct cause of the devaluation. And the finalagreement retains the provisions to authorize a world,wide inflation.Another declared purpose of the Fund is "theelimination of foreign exchange restrictions." But the

detailed proposal itself not only permits butencourages and necessitates foreign exchange restric,tions. "The post,war transitional period" is made anexception, during which nations may introduce orcontinue whatever foreign exchange restrictions theywant. The "post,war transitional period" is notprecisely defined, but is apparently to last at leastthree to five years. Even after this any nation may"regulate international capital movements," and insome cases will be even requested to do so. If a cur'rency becomes "scarce," other nations may rationthat currency and "impose limitations on the freedomof exchange operations in the scarce currency." Allthis implies a return to the foreign exchange restric,tions developed in the Thirties. It implies a world inwhich individuals will act under more, not less,62


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government coercion and will have less freedom tobuy and sell and make payments where they like.The proposed agreement sets up a huge machineryand ignores all the basic principles which must beadopted if such machinery could hope to be suc,cessful. The American money poured into support'ing weak foreign currencies will be worse than wasted,unless the loans are made conditional upon internalreforms in the borrowing nations. Such nations musteschew resort to financing by the printing press. Theymust prepare to balance their budgets and make theircurrency convertible into gold or into a gold,convertible currency at par. The United States musttake the lead in these reforms. Only on these condi,tions will genuine currency stability, freedom ofworldtrade, and continuous international cooperation bepossible.

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What was contemplated in the Bretton Woods agreementsand in the 1944 proposed international commodityagreements was not freedom for individuals in differentcountries to trade with one another on their own terms, buta world in which international prices and trade would beState-dominated. This. would only lead to failures, as inthe past, and to dangerous international antagonisms.


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9

To Make Trade FreeJuly 27, 1944

The agreements reached at Bretton Woods and theAdministration's plans for international talks lookingto post,war commodity agreements combine to forma pattern of the kind of post,war economic world thatour Government and certainly a number of otherGovernments have in view. From the standpoint oftraditional freedom of trade the outlook is not an en,couraging one. When Adam Smith made his greatplea for freedom of trade in a world strangled bygovernmental obstacles and prohibitions, thefreedom that he had in mind was that of the in,dividuals directly concerned. "In every country," hewrote, "it always is and must be the interest of thegreat body of the people to buy whatever they want ofthose who sell it cheapest." The freedom of theindividual buyer corresponded to the freedom of theindividual seller, who likewise, Adam Smith a r g ~ e d ,should be free to sell in the best market andpresumably to take payment in the manner that hehimself chose in return. But it is certainly not thiskind of freedom, the freedom of the individualcitizens of each country, that the Bretton Woodsagreements or the proposed commodity agreements

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have in mind. On the contrary, these agreementspresuppose a world in which the type of governmen,tal controls developed in the Twenties and Thirtiesare to be expanded and systematized. What is con,templated is a world in which international trade isState,dominated.An interdepartmental committee of technicians isworking in Washington on a program for agreementsto "stabilize" the price of international commodities.

If the experience of the Twenties and Thirties provedanything, one would have thought that itdemonstrated above all not only the futility but theharm of this sort of state "stabilization." Even if weassume that we had a body of the ablest and mostdisinterested economists controlling the system, theywould not be able to fix the "right" price for interna,tional commodities. They could not know and weighproperly the thousands of factors that go to form suchprices and that determine their fluctuations from dayto day. But, as a matter of fact, the Government ex,perts are not always experts and they are almost neverdisinterested. They are usually the servants ofpressure groups within their own countries. Almostinvariably, as a result of the demands of their owngrowers or producers, their idea of "stabilizing" acommodity is to price it too high.Out of scores of examples we need merely recallwhat happened in the inter,war period in the case ofrubber and cotton. The British rubber producers,

who had almost a world monopoly, restricted exportsto force up the price. The first result was intenseresentment in America, the chief consuming country.But the longer result was that the Dutch and othernon,British countries expanded their production ofrubber so that the scheme ultimately left the British66


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rubber growers in a far worse position than if it hadnever been put into effect. Similarly, the UnitedStates kept up the price of cotton artificially beforethe war by acreage restriction and Government loans.The result was not only that we lost foreign marketsand had to put more than a whole year's supply ofcotton in storage, but that we encouraged an increaseof 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 ofAgriculture arerepresented as desiring permanent instead of merelytemporary international commodity agreements,while other experts hold that such agreements fixingprices and production on world markets would be in,consistent with our governmental opposition tocartels. This is perfectly true. And in addition to thisinconsistency we must remember that the nationsthat are the chief consumers of the raw materials willresent the fixing of prices above the natural marketand that such economic disagreements will lead todangerous political antagonisms.There is a grave danger that the phrase "interna,tional cooperation" may be perverted to mean thedrawing up of agreements between Governments tocontrol at every point the economic transactions oftheir own citizens. In the economic field, on thecontrary, true international cooperation means thetermination of such governmental controls, whichare invariably conducted in the interests of politicalpressure groups, and the return to a world in whichmen are free to trade and produce at the prices fixedby supply and demand and competitive efficiency.

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The plan put forward by Winthrop W. Aldrich, Chair-man of the Board of the Chase National Bank, deservedserious study. 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 poorcurrencies" -merited particular attention.


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10

Mr. Aldrich'sMonetary PlanSeptember 19, 1944

Winthrop W. Aldrich, Chairman of the Board ofthe Chase National Bank, suggests as a substitute forthe plans advanced at the Bretton Woods conferencethe negotiation of international agreements for theremoval of trade barriers and the establishment of astable dollar,sterling exchange rate. Whatever maybe the final verdict upon the merits of his proposal,his analysis of the proposed International Fund andBank is thoughtful and impressive, and his ownpositive proposals make it obvious that his viewpointis far from that of an economic nationalist.Mr. Aldrich points out that under the instructionsfrom the President both the American delegation at

Bretton Woods and the delegations of other countrieswere committed to a particular monetary plan in ad,vance and were not free to work anew on the problemor to consider an alternative approach. The powersof the Fund "seem to be obscure and uncertain." Itsobjectives "lack the focus essential to its success." TheUnited States, by far the largest contributor, will becalled upon to supply "about 70 per cent" of the reallendable assets of the Fund. "Inasmuch as the Fundgives nations with relatively poor currencies access,

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on an automatic basis, to relatively good currencies,the good currencies may be pulled down to thelevel of the poor currencies." Mr. Aldrich cites themany liberal provisions for alterations in exchangerates, and fears that under them "exchange d e p r e c i a ~tion would undoubtedly become an accepted andnormal procedure in international financial affairs."Proposals for exchange depreciation, indeed, "wouldbe inevitable, since the plan attacks the symptomsrather than the basic causes of exchange instability."The effect ofthe Fund provisions, he fears also, wouldbe to increase rather than reduce exchange controls.After an examination of the proposed internationalBank, Mr. Aldrich concludes that there is no soundfunction it could undertake which could not be donebetter by our own existing E x p o r t ~ I m p o r t Bank.Mr. Aldrich then comes to his alternative proposal."The a l l ~ i m p o r t a n t economic problem of the p o s t ~ w a rworld is the removal of trade barriers." He proposesthat the United States, the United Kingdom andother members of the British Commonwealth enterinto immediate conversations on such problems astariff barriers, imperial preference, export subsidies,b u l k ~ p u r c h a s i n g and regional currency arrangements.If the proposed conference proved successful inachieving a joint agreement to shun totalitarian t a c ~tics in international trade and to adopt economicliberalism, the United States should offer to provideEngland "with a g r a n t ~ i n ~ a i d sufficiently large toestablish stability between the dollar and the pound.The sum needed may be a large one-but the problemis large and we must show courage in its solution."Once the d o l l a r ~ p o u n d rate is stabilized, attentionshould be directed immediately to the stabilization ofother currencies. "The prerequisites are internal70


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political stability, a constructive solution of the pro'blem of trade barriers, a reasonable measure ofeconomic well,being and the absence of inflation."Implicit in all this, Mr. Aldrich concludes, is ourresponsibility to make our own currency in the post'war period one in which other nations can haveconfidence. This, as he shows, will not be easy, for itwill involve the repeal of some unsound monetarylegislation still on the books, and it will involveultimately a balanced Federal budget.There would clearly be some embarrassment in set,ting aside now the plans agreed to at Bretton Woods,even if they have the defects and dangers that Mr.Aldrich believes they have. It is by no means certain,

either, that an Anglo,American agreement of thetype he recommends could be brought about. But hehas put forward a carefully reasoned argument and aconstructive proposal that deserve serious open,minded study.

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Prof. John H. Williams of Harvard and vice,president ofthe Federal Reserve Bank of New York, in an article inForeign Affairs, suggested that Congress postpone anydecision on the proposed Fund, but adopt the proposedBank with modifications. He found it to be an "unstatedassumption of the Fund", among others, that there wouldbe "a general retention of the machinery of exchange con,trol not only for the transition period but permanently."


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11

International MoneyPlansOctober 1, 1944

In the current issue of Foreign Affairs, John H.Williams, Professor ofEconomics at Harvard and vicepresident of the Federal Reserve Bank of New York,who was a critic of the proposed InternationalMonetary Fund in its formative stages, returns to acriticism of that proposal in the form adopted at Bret....ton Woods. He recommends that Congress postponeany decision on the Fund at present, but makes theinteresting compromise proposal that the proposedInternational Bank should be adopted and its func,tions expanded to achieve some of the ends that theFund was intended to achieve.Mr. Williams begins by pointing out that Congressfaces a difficult dilemma. The monetary plans framedat Bretton Woods will present one of a series ofmajordecisions about post,war international arrangements.OU f action on them will be taken as an omen ofthings to come. If the plans are defective, we mustfind better ones.

"But it will not seem constructive to insist in 1945upon some wholly new approach and to start thewhole process of international negotiation over again.The realistic and helpful approach, now, whatever

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one's earlier preference may have been, is to seewhether out of these plans, a solution can be found."Mr. Williams suggests that it would be wise toseparate the proposed Fund from the proposed Bank,to adopt the Bank with modifications and towithhold for the present a decision on the Fund. Hepoints out that the Fund is intended, in any case,primarily as a long-run agency ofmonetary regulationand is unsuited to handle the transitional problemsthat will chiefly exist in the next few years. It wouldsupply funds "indiscriminately to all the United Nations and would make them available on a timeschedule and as a matter of automatic right." Hefinds it to be "an unstated assumption" of the Fundthat there will be "a general retention of themachinery of exchange control not only for the transition period but permanently." This would mean ageneral system of foreign exchange "reporting andpolicing." The provisions for declaring a currencyscarce and for rationing its supply would subject theUnited States, he holds, as the leading creditor nation, to exchange and trade discrimination. But thereare no provisions for applying corrective measures tothe wrong policies of debtor nations.On the other hand, in looking for a compromisesolution, Mr. Williams has become "increasinglyinterested since Bretton Woods in what might be accomplished through the Bank." This has led him to

"wish to explore the possibilities of extending theBank's functions to include some part of what isdesired from the Fund." For the transition period, inparticular, he thinks it could be the better instrument. "It would not, like the Fund, distribute foreignexchange resources indiscriminately to the manycountries that do not need them as well as to those74


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that do. It would operate selectively, and withdiscrimination, both as to place and to time." Mr.Williams suggests that in addition to its present i n tended functions there might be added to the Bankan exchange stabilization loan department. "It wouldrequire a much smaller sum and at the same time p r o ~bably be much more flexible and effective than theproposed Monetary Fund."Meanwhile, he thinks, the central p o s t ~ w a r i n t e r n a ~tional economic problem will be the solution ofEngland's special difficulties created by the$12,000,000,000 accumulation of sterling warbalances in London. When this has been disposed of,the solution of monetary stabilization, he is c o n ~vinced, must be found through the "key currencies"principle, and must be built upon the stabilization ofthe two key currencies, the dollar and the pound,with respect to each other.

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While the Bretton Woods talks were going on, thecountries of Europe were trying to solve their immediatecurrency problems individually. But Belgium, for exam-ple, was planning the unnecessary and dangerous course ofdeflation by reducing its outstanding note circulation by 30or 40 per cent and freezing people's bank balances. Defla-tion merely brings injustices and other evils of its own,without undoing the harm of past inflation.


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12

Europe's MonetaryMazeOctober 27, 1944

A dispatch from London to this newspaper declaresthat the question of the merits or demerits of the B r e t ~ton Woods world currency stabilization agreementhas been pushed aside as academic in Great Britainby the more immediate and acute currency problemsthat threaten the liberated countries of Europe. Thiscalls attention once more to the fact that, contrary tocommon belief, the proposed International MonetaryFund is planned as "a permanent institution" and isnot designed to solve the currency problems of thetransitional period from war to peace. It is preciselythese problems, however, that are the more difficultto solve.The boldest attempt to bring order out of chaos in

the domestic currency situation has been made inBelgium. The other liberated countries of Europe arewatching this experiment anxiously. Many of thedetails of the Belgian plan have not been made clearin the cables; but the plan in its broader outlines doesnot appear to be well'conceived. It aims to reversepart of the inflationary process by deflation, by r e d u c ~ing the outstanding note circulation by some 30 or 40per cent, and by freezing people's present bank

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balances so that they can spend only a small part ofthem.But once inflation has done its harm,it is impossible to try to undo this harm by the reverse policy ofdeflation. The deflation merely brings a new series of

injustices and difficulties. Its most dangerous aspect isthat by trying to force down prices and wages fromthe levels they have reached, it may result ineconomic stagnation, in unemployment, in a throttling of production. The process is politicallyunpopular; so much so that our London dispatchdeclares that the Belgian deflationary program, whichis less than two weeks old, already threatens the overthrow of her present Government.The safest policy for a Government to follow, once

inflation has been allowed to occur, is to try merely toprevent the process from going further, by fixing anew value for the currency calculated to stabilizeprices and wages at their new level. This meansrefusal to put out further issues ofpaper money, but itrarely involves recalling (except in exchangefor new currency) part of the paper money alreadyoutstanding.The currency problems of liberated Europe arecomplicated by many other factors. One of these is

the system of price fixing. When prices of necessitiesare fixed below t

From Bretton Woods to World Inflation

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