23. Forecasts on the Convertibility of Currencies

(L’Opinion, June 17, 1954)

Every day the prophets ask themselves whether currency convertibility is to occur soon or in the distant future. Everyone knows that this expression “currency convertibility” is a pleasant euphemism to translate those three little words “a return to gold,” these last having been banished from the language of the Anglo-Saxons as being in supremely bad taste, as they remind one much too vividly of the unseemly conduct of the yellow metal during the crisis of 1931.

The signs portending a return to gold which are mentioned most frequently are the following: the reopening of the gold market in London (despite its incomplete character); the strengthening of the gold reserves of various Western countries, particularly Great Britain, France and West Germany, not to speak of the national banks of Belgium, the Netherlands and especially Switzerland, whose gold reserves are constantly growing; the sales of gold being effected on Western markets by countries such as the USSR, which up to now had maintained an attitude of reserve; the relative stability of wholesale prices in the last two or three years; the return to a balanced budget in the leading industrial nations with the exception of France, etc., etc.

Against all these favorable factors, two elements persist which incline observers toward pessimism:

1. The official refusal by the United States to modify the price of gold, a refusal which was again underlined very recently, at the end of March, in the testimony given by Mr. Burgess, Under-Secretary of the Treasury, before the Committee of the Senate.

2. The psychological attitude peculiar to all Ministers of Finance, after the long-drawn-out period of anxiety through which they have lived, and which is the very natural hesitation of each of them to “cross the Rubicon,” before making sure of every last condition assuring the success of such a step.

The report of the Bank of the Netherlands, just published, underlines that it is ready to resume convertibility, but that a small country such as Holland cannot undertake this venture all by itself.

I am not speaking, of course, of the uncertainty which still remains concerning the reestablishment of peace in the Far East, and until any such uncertainties cease to exist no Minister of Finance will feel able to make a final decision.

Under these circumstances, those who like myself, favor and have always favored, a return to gold, are limited to two or three elements on which to base their forecasts. The first, and the main one, is the general movement of prices. It is well known that, on this point, economists and statisticians have widely varying opinions: some declaring that a drop (in prices) is unavoidable; others, and especially the Americans, assure us that the “recession” which we have just witnessed is already ended, and that we are once more on our way towards a new era of rising (prices) which will be facilitated by a policy of liberal credit. Others, on the contrary, are convinced that the trend towards lower (prices) is written in all the economic conditions of the present. This last possibility seems to me to be infinitely more probable than the first one. Whatever the outcome, we are faced by two different possible situations:

In the first case, if we are really at the inception of a new era of rising prices, such an era will require, to assure its continuation, the necessary creation of means of payment which will keep step with the increase in production. This policy is advocated in the United States by a number of authorities. But, if such a policy is not accompanied by gold convertibility, it will lead us, in my opinion, to consequences which no one can contemplate without apprehension, It will, in fact, constitute a complete novelty in the monetary management of the world. It is thus an unprecedented adventure upon which the world economy will embark under the leadership of the United States.

In the second case, that of a regular drop in world prices, either the United States will maintain the present price of gold, or, on the contrary, they will give their consent to an increase.

If the price of gold is maintained, which seems more likely at present, the gold reserves of other countries will be increased almost exclusively through an improvement of their trade balances, exchanges of capital remaining necessarily limited and precarious. It will thus require a fairly considerable time for these governments to decide to “cross the Rubicon.” If, on the other hand, the United States should consent to a change in the price of gold (and the drop in prices could serve here as a lever sooner than one thinks), the resulting increase in existing stocks as well as in the production of (gold) mines could give a strong impetus to the reestablishment of convertibility.

All that has just been said obviously concerns those countries which have pursued their financial rehabilitation to the point where they are secure against renewed inflation. This is not the case of France. With a budget deficit of 800 billion francs, the reestablishment of convertibility would again be a hazard. This is sad, but true.

The above predictions are based on a number of hypotheses, each of which merits a particular study. What I wish to underline is that all of them depend on the trend of prices during the coming years in the United States. It is a fact that the American economy constitutes in itself, because of its uniquely powerful character, a potent factor of incertitude.