The Problem of Post-War Monetary Stabilization


By WINTHROP W. ALDRICH, Chairman, Board of Directors, The Chase National Bank of the City of New York

Delivered at a Luncheon Meeting of the American Section International Chamber of Commerce,Waldorf-Astoria Hotel, New York City, April 29, 1943

Vital Speeches of the Day, Vol. IX, pp. 542-544.

THE end of the war will give rise to innumerable problems of an economic character, many of which doubtless will prove quite as difficult to solve as those of a strategic character which are now giving concern to our military and naval staffs. One of the most difficult of all economic problems and one which will press for immediate solution is that of monetary stabilization.

Problems of monetary stabilization arise from each major war. That this is generally true is illustrated in the case of England during the Napoleonic period, of our own country following the Civil War, and of practically every neutral and belligerent nation following the close of the first World War. The reason that such problems arise is that war financing needs are not met entirely from taxation or from the sale of bonds to investors. To a greater or lesser extent, wartime deficits are met through currency or credit inflation. In consequence of the policies followed, post-war problems of monetary stabilization, from an internal point of view, involve the checking of inflation and the balancing of budgets, and from an external point of view, the resumption of gold payments and the elimination of foreign exchange controls. Both internal and external stabilization must take place before businessmen can make future plans relative to production and trade, before people can save with assurance, and before normal international trade and capital exports can be resumed.

After the first World War, the problem of monetary stabilization was handled separately by each nation. In certain instances, nations were able to stabilize their currencies without the assistance of foreign credits, while, in other instances, nations were able to stabilize their currencies only after assurance had been received that foreign credits would be granted, or only after such credits had actually been extended. The United States was the first nation, in June, 1919, to resume gold redemption, and for several years thereafter the dollar was the only important currency that afforded stability in international exchange. Following the debacle of the mark, Germany established a new currency in 1924. Great Britain returned to gold in 1925, and France effected a de facto stabilization of her currency in 1926. The United States and Great Britain returned to gold at prewar parities, Germany was forced to reconstruct her currency and banking systems, and France suffered a substantial depreciation in her currency. About eight years elapsed after the close of the last war before the currencies of all of the leading belligerent powers had been reconstituted.

The total character of the present war, involving a huge drain on national income, a sharp rise in internal debts, a marked reliance on the expansion of bank credit, a growth in abnormal war balances, and the imposition of all-pervasive economic controls, makes the problem of monetary stabilization even more difficult than it proved after the first World War. In the case of our own country, the difficulties of the problem are further increased by the monetary and fiscal policies which were followed during the eight years preceding our entrance into the second World War. I refer to the abandonment of the gold standard, the devaluation of the dollar,-the purchases of silver, and the increase in the public debt, which in combination tended to impair the financial strength of the United States.

Two Proposals for Stabilization Compared

The magnitude and urgent character of the problem of monetary stabilization have received emphasis in two plans recently issued on the subject. The one proposed by the United States Treasury in preliminary draft outline calls for the establishment of a United and Associated Nations Stabilization Fund, and the other, proposed by a group of British experts, also in tentative form, calls for the establishment of an International Clearing Union. While I shall not have time to make an extended examination of these two plans, I should like to point out their general purpose, their similarities, and differences.

The avowed objective of each plan is to establish an international currency having general acceptability, to stabilize exchange rates, to provide a mechanism for the clearing of international transactions and for the granting of international loans, and to provide a means for influencing and controlling the financial and economic policies of member nations. In addition, the American plan suggests a method for the liquidation of abnormal war balances.

The two proposals contemplate an over-all stabilization of the exchange rates of the member countries. In this way it is hoped that the time required for exchange stabilization after this war may be considerably less than that required after the last war. In the American plan, the Fund itself will fix exchange rates, whereas in the British plan, member nations will agree to a tentative stabilization of their currencies, prior to the establishment of the Clearing Union. Each plan makes provision for alterations in exchange rates. In the British plan an adverse balance of payments leads almost automatically to a depreciation of the currency of the nation in question.

The fact that both proposals give recognition to the importance of the external stabilization of currencies represents in itself a marked advance over the attitude of our own Government at the London Economic Conference in 1933. It also represents a marked advance over the doctrines of many economists of the decade of the thirties, which heldthat external stabilization was an undesirable goal of monetary policy.

In order to effect the external stabilization of currencies, each plan provides for a new international unit that is to be related to gold. The American plan fixes the gold value of the "Unitas" permanently and gives gold a more central and significant role than does the British plan. Although the British plan fixes the gold value of the "Bancor" initially, it suggests that later changes may have to be made, and suggests further that nations should permit the exportation of gold only under license, and that nations should not return to a full gold standard with two-way convertibility.

Provision for the extension of credits to nations requiring such assistance is incorporated in each plan. In the American plan, credit extensions are to be made through the purchase of the currencies of the borrowing nations, and in the British plan through the establishment of over-draft facilities. Although subject to certain maximum limitations, credit extensions in both plans apparently are to be made for indefinite periods and at a very nominal charge. Also, up to certain amounts, they are to be extended on a semi-automatic basis, without emphasis on the credit worthiness of the borrowing nation.

An important difference in the two plans consists in the fact that the American Fund would actually possess assets contributed on a pro-rata basis by member nations. The British Clearing Union would not possess assets at its organization but would allow member nations to build up credit or debit balances to certain prescribed limits and subject to certain conditions.

Such in brief is the general outline of the two plans. It will be noted that they comprise three essentially different elements and, in this respect, they differ from the objectives and scope of the national stabilization funds that came into existence some ten years ago. The three elements are provisions for the stabilization of currencies, provision for the extension of foreign credits, and provision for the influencing or controlling of the domestic financial and economic policies of member nations. It is questionable whether three such diverse objectives should be incorporated in one plan. For example, it would seem the better policy to separate the function of currency stabilization from that of foreign lending. The credit extensions to be granted under either the American or British plans would tend inevitably to become long-term in character, and credit extensions of this character should be handled by other agencies. The only loans that should properly be granted by an international stabilization fund, if one were to be established, would be those designed to eliminate seasonal fluctuations in exchange rates. Longer-term credits should be handled by banking institutions of an investment character.

Three Important Questions Raised

In a general evaluation of these two proposals, several questions, it seems to me, must be borne in mind. The first is whether, from a political point of view, nations are likely to subscribe to this method of handling the problem of monetary stabilization; second, whether, from an economic point of view, an over-all stabilization of currencies can precede internal credit and monetary stabilization; and third, whether some alternative plan might not represent a more practicaland realistic solution to the problem of post-war monetary stability.

The first point to be considered in connection with an evaluation of the plans has to do with the willingness of nations to part with their sovereign rights to the extent contemplated. Both plans presuppose a considerable degree of control over domestic monetary and economic policies. Thus, in the American plan, nations are to maintain exchange rates established by the Fund and not to alter these rates without the consent of the Fund. Once exchange rates have been established, the British plan provides that alterations may not occur subsequently without the permission of the Governing Board. Again, in the American plan, each member nation agrees that it will offer to sell to the Fund all foreign exchange and gold that it acquires in excess of the amount it possessed immediately after joining the Fund, and each member nation agrees to discourage the unnecessary accumulation of foreign balances by its nationals.

Implied in both plans is the establishment of strong international economic controls. In fact, the British experts suggest that their plan might form the basis of a future economic government of the world; might help finance post-war relief, rehabilitation and reconstruction; might provide an excellent machinery for the enforcement of financial blockades; might help finance international commodity control projects; might be associated with a Board for International Investment and might be used to maintain stability of prices and to control the trade cycle. The first question then that would have to be considered in the current discussions inWashington has to do with all aspects of the problem of sovereignty.

In addition to those difficult problems involving sovereign rights, nations must of necessity give careful consideration to certain economic implications of the two plans. A fundamental point is whether an over-all external stabilization of currencies can be effected before internal stabilization has taken place. In the past, internal stabilization has been regarded as the prerequisite for the stabilization of the foreign exchanges. The sequence has been from the balancing of internal budgets and the checking of inflation, the removal of price and rationing controls and the re-introduction of some form of the gold standard to the stabilization of foreign exchange rates. Only by following such policies can the internal purchasing power of a currency be determined, and only when the internal purchasing power is determined will it be possible to fix rates of foreign exchange.

To be enduring, the stabilization of exchange rates must rest on the firm basis of sound internal fiscal and monetary policies. We cannot erect a monetary superstructure until we have built a firm base. The soundness of that base will depend upon our willingness to adopt appropriate internal measures of fiscal, credit, and monetary reform. An over-all stabilization of exchange rates would seem to represent an unrealistic approach to the problem. Each nation must, as it did after the last war, painfully retrace its steps to monetary stability. The road back cannot be made easier by the establishment of a Stabilization Fund or Clearing Union. There is no short cut to currency stabilization.

Still another question having to do with the economic implications of the two plans concerns their relationship to the problem of foreign exchange control. The question is whether the adoption of either the American or British proposal would help to eliminate foreign exchange controls on current account, or whether the plans, in actual operation, would tend to perpetuate such controls. Although it is the avowed objective of each plan to eliminate foreign exchange controls on current account, I doubt if this would result in practice. It seems to me that both plans could function satisfactorily only if the foreign exchanges on current account were controlled as completely and fully as is contemplated for the control of the foreign exchanges on capital account. In the last analysis, the two plans might tend to perpetuate those very controls over the foreign exchanges and trade, which it is their avowed purpose to eliminate.

An Alternative Plan Suggested

By way of summary, an evaluation of the two plans must consider both their political and economic aspects. From a political point of view, nations will have to decide whether and to what extent they wish their financial and economic policies to be subject to international control, and whether and to what extent they wish the decisions of international boards to be substituted for the free competitive forces of the market place. From an economic point of view, a decision will have to be reached concerning the possibility of stabilizing foreign exchange rates before internal inflation is checked, and concerning the bearing of either plan on foreign exchange and trade controls.

In conclusion, I would like to suggest as an alternative to the two plans proposed in tentative form by the American and British experts that at the earliest possible moment a "free dollar" be established in the post-war world. This would involve the checking of domestic inflationary forces, the resumption of gold payments, and the removal of all foreign exchange controls. If these measures were taken, the dollar would constitute a sure anchorage for the currencies of other nations and would become a generally acceptable international medium of exchange. All international transactions, including those of a bilateral or multilateral character, including the exportation or importation of goods, including short- or long-term capital movements, could be cleared on the basis of a dollar freely redeemable in gold and freed of foreign exchange controls. An important step towards the establishment of such a currency has already been taken by Congress in its refusal to prolong the power of the President to devalue the dollar further. The assumption of international financial responsibilities of the character described means that we must be prepared to make corresponding adjustments in our trade policies. Through a renewal of the Reciprocal Trade Agreements Act, we now have an opportunity to give tangible proof to the rest of the world that We are prepared to make further downward revisions in trade barriers. The re-introduction of a fully functioning gold standard and continued adherence to liberal trade policies will make an important contribution to post-war economic recovery and will combine to put into practical operation the principles of the Atlantic Charter.