A World Super-Bank?

January 2, 1961

As the gold-and-dollar problem increases, and no one in authority wants to take the agonizing corrective steps, everyone tries hopefully to find some painless and easy way out. This accounts for the sudden popularity of two proposals. One is to abandon even the legal 25 percent gold reserve requirement in our Federal Reserve System. The other is the proposal of Robert Triffin of Yale to set up a world super-bank.

The first proposal, already put forward by a few American bankers, has now been blandly endorsed by no less a figure than Per Jacobsson, the managing director of the International Monetary Fund. I have already devoted several articles to trying to show what is wrong with it. It would destroy the last meaningful restraint on credit expansion. Against its paper liabilities our banking system would be required to hold nothing but paper reserves. There would be no further brake on inflation except the arbitrary discretion of our monetary managers. And these would have politicians and labor leaders constantly breathing down their necks demanding more inflation to maintain “full employment.”

KEYNES PLAN REVIVED

The Triffin plan would turn the International Monetary Fund (IMF) into an international central bank for national central banks. These central banks would be required to keep on deposit at the IMF a minimum of 20 percent of their total reserves of gold and foreign currencies. Against these reserves the IMF could make loans and create deposits, or conduct “open market operations”—in other words, manufacture more money or more “reserves” against which more money could be issued.

In broad outline, this is a revival of the Clearing Union scheme originally proposed by Lord Keynes at Bretton Woods. The Keynes plan was rejected on the sound argument that it would have led to continuous world inflation. Triffin tries to meet this by proposing that his world super-bank should not be allowed to inflate at a rate of more than 3 to 5 percent a year. He does not say what assurance we have that most member governments would not vote, as soon as they got into difficulties, for a much faster rate.

Another objection to the Keynes plan was that it would have meant a surrender of national sovereignty to an international institution. To keep its currency at parity with the world central bank’s, every nation regardless of its internal economic or political situation, would have had to inflate as fast as, but no faster than, all the rest. Triffin would apparently meet this by allowing considerable monetary “independence” to each nation. They could of course have all they want of this now, with no international central bank at all. But if they had this “independence” with a world central bank, then the countries that inflated the most would be exploiting the countries that inflated less.

WHO GETS WHAT?

This calls attention to the central fallacy of the world central bank scheme. It would be a bank in which the U.S. would make the lion’s share of the deposits while the “underdeveloped” countries would get the lion’s share of the loans. This would mean more foreign aid, though disguised. Even under the IMF, as Triffin admits, the U.S. has been practically “the sole net lender.”

In a world super-bank, there would be endless disputes concerning the distribution of the newly created fiat money among the member nations. These conflicts would probably lead to the breakdown of the whole scheme.

The reason proposals like this are now being seriously discussed is that no one likes to face the alternatives. An embargo on the outflow of gold, or a unilateral devaluation of the dollar, in the sense of a marking up of the dollar-price of gold, would be regarded as a breach of faith by the central banks that hold reserves in dollars. The mere discussion of such plans would precipitate massive anticipatory speculation and a crisis.

An indispensable part of any real cure would be a complete halt to our inflation. As prevailing opinion thinks that inflation is necessary to maintain employment, nobody likes to face this. That is why we listen to siren voices assuring us that the cure for the evils of past national inflation is more world inflation.