World Monetary Reform

October 21, 1963

Representatives of ten leading industrial nations announced on Oct. 2 that they would start the first major negotiation and study of the world’s monetary system since the Bretton Woods Conference twenty years ago.

The project suggests misgivings concerning the workings of the system set up at that time. But the prospect of reform in the direction of a sounder system is not bright. For the basic assumption of all governments today is that they have not only the right but the duty to tamper constantly with the national money. This is known as “monetary management.”

The general lines along which the study and negotiations are likely to proceed are indicated in an article in the October issue of Foreign Affairs by Under Secretary of the Treasury Robert V. Roosa. This article may fairly be taken as reflecting present official U.S. policy.

Unfortunately Roosa begins by rejecting out of hand the only real solution—a return to a full international gold standard. He repeats the old charge that this was precisely the “system which broke down after World War I and led to the currency chaos of the ’30s.” The gold standard did not “break down.” It was deliberately abandoned and destroyed by monetary “managers” who wanted to dilute and inflate their national currencies, and rightly recognized the gold standard as the great barrier to their plans. The reason governments are now implacably opposed to a return to the full gold standard is that it would deprive them of their present powers to “manage” and “expand”—in brief, to inflate.

WORDS VS. REALITIES

Roosa, of course, puts this in more euphemistic words: “National policies for incomes, as well as for interest rates and credit availabilities, seem to be, or to be becoming, a normal part of the responsibilities which all governments now acknowledge in varying degrees for promoting growth, avoiding instability, and achieving external balance.” Compare these words with today’s realities. It is precisely these income and interest-rate “policies” that have retarded growth, created instability, and destroyed external balance. The dominant cause of the deficit in our balance of payments, and of our loss of gold, is our domestic inflation.

The monetary “reforms” that Roosa thinks will be considered all contemplate continuance of “the present gold-dollar-sterling-IMF system as the means of providing reserves,” as well as enlargement of currency swaps and other “cooperative credit arrangements,” enlarging the resources of the IMF and the drawing rights of its members, and even “endowing it with the capacity to create credit and the power to allocate such credit among members.”

All such proposals are ways of continuing and increasing credit expansion and currency inflation.

DEPRECIATION RECORD

In Roosa’s whole article there is not a word about the dreadful record of world currencies under the IMF system. On the contrary, we are told that “the Bretton Woods system is nearing the end of its second decade, a decade of remarkable achievement.” Remarkable indeed. The last two decades show the worst record of international inflation, depreciation, devaluation, and repudiation ever achieved in peacetime if not in war.

Let us skip over the devaluation of the British pound and scores of other currencies in 1949 and take the record of the last decade alone, as presented, say, in the July letter of the First National City Bank of New York. A table of 43 national currencies shows depreciation (in domestic purchasing power) in all of them over the 1952–62 decade, ranging from 1.3 percent annually for the U.S., to 2.9 percent for Britain, 3.5 percent for France, and 21.5, 25, and 35.2 percent annually for Brazil, Chile, and Bolivia respectively.

The only reason the system has “worked” until now is that the dollar, to which all the other currencies are tied, has been anchored to gold. But with the anchor itself in danger of drifting from its present gold base, the only “reform” the world’s monetary managers have to suggest is to increase the facilities for U.S. and world inflation.