Inflation Disrepute

July 21, 1958

The effort to create a common European market calls attention to the radical reforms necessary in present-day economic and monetary policy even to move toward such a goal. The International Chamber of Commerce recently issued a statement dealing with the monetary problems of the European Economic Community. Among the major recommendations two stand out:

1—The member governments should agree not to ask their central banks for new credits “save in exceptional circumstances recognized as such in accordance with agreed criteria, by a competent body designated by them.”

2—The present claims on governments held by the central banks should be gradually transformed into negotiable securities bearing interest rates to make them attractive on the international monetary markets.

The purpose of the first recommendation is obviously to try to stop deficit spending by governments, financed by monetizing of new government debt. The purpose of the second recommendation is to restore liberty of action and transferability of assets to the central banks.

HOW FAR FROM FREEDOM

It is instructive to notice that the best experts of Europe are growing skeptical of the blessings of deficit spending and monetary inflation just when Washington has decided that this is the way to cure any recession. The chairman of the commission that prepared the ICC statement was Maurice Frere, formerly head of the Central Bank of Belgium. Among those who cooperated with him were Emmanuel Monick, formerly governor of the Bank of France, Herman Abs of the Deutsche Bank, Camille Gutt, former managing director of the International Monetary Fund, and other distinguished European bankers.

There is no doubt whatever that if the recommendations of the ICC were followed they would constitute an immense step toward currency stability and greater freedom of international trade. Yet they also emphasize how far away the “free” world, with all its beautiful talk about international cooperation and common markets, still is even from the amount of freedom and international cooperation that existed prior to the second world war, not to speak of the amount of freedom and international cooperation that existed prior to the first world war.

The most immediate international monetary need is the restoration of full currency convertibility—to any amount, and at any rate that those who wish to exchange currency find mutually agreeable. This convertibility could be restored overnight. All that is needed is that the governments of the world should permit it. But this is precisely what the International Monetary Fund and exchange control exist to prevent.

FORWARD TO GOLD

It is true, of course, that with practically every country on a paper-money basis, and subject to varying degrees of inflation, there would be wide fluctuations in the exchange rates between currencies. But these would be cured if the countries returned to a gold standard.

The final paragraphs of the statement by the ICC declare wistfully that the reforms it recommends “should result in creating among the common-market countries a ‘monetary community’ which may perhaps lead them one day, when political conditions make it possible, to a single currency. This would be the last stone crowning the edifice.” But this “single currency” was, in effect, what virtually the whole world enjoyed, under the international gold standard, prior to 1914. When every currency unit was freely convertible on demand into a specified weight of gold, there was a de facto common currency. The ICC statement declares that a single currency today would be “premature and “artificial” until nations “coordinate and harmonize their monetary policies.” It was precisely the requirement of constant gold convertibility that forced them to coordinate and harmonize their monetary policies prior to 1914. No elaborate international bureaucratic machinery was necessary.

In currency matters the world of 1958 has an enormous distance to go before it can even catch up with the nineteenth century.