A Universal Currency


By LORD KEYNES, Member of the Chancellor of the Exchequers Consultative Council

Delivered Before the House of Lords, London, May 18, 1943

Vital Speeches of the Day, Vol. IX, pp. 587-590.

MY LORDS, I do not address you for the first time with any less trepidation because the subject of our discussion this afternoon is one with which I have become very familiar in recent months. But I rely on your Lordships' sustaining kindness to a newcomer. The proposals for an International Clearing Union have been brought before Parliament at an early but not too early a stage of their evolution. The procedure adopted is somewhat novel. I hope your Lordships will approve it for, if it is an innovation, it appears to me to be a happy one. This Paper has been the subject of long preparation. To associate it too closely with particular names is, I venture to say, to do it an injustice. It has been the subject of intensive criticism and progressive amendment and the final result is the embodiment of the collective wisdom of Whitehall and of experts and officials throughout the Commonwealth. At the same time, it has been brought to the judgment of Parliament and of the public opinion of the world before any final crystallization of ideas.

A General "Consciousness of Consent"

It seems to me to be far better that our own Treasury and the Treasury of the United States should have decided to seek wider counsels before concentrating on the preparation of an actual plan—much better that they should take this course than that, without open consultation with their Legislatures or with the other United Nations, they should have attempted to reach finality. The economic structure of the post-war world cannot be built in secret. Mrs. Sidney Webb, whose recent loss we so greatly deplore, in my judgment the most remarkable woman of our time and generation, once defined democracy to me as a form of government the hall-mark of which was that it aimed to secure "the consciousness of consent." So in the new democracy ofnations which after this war will come into existence, heaven helping, to conduct with amity and good sense the common concerns of mankind the instrumentalities we set up must first win for themselves a general consciousness of consent.

The first of these instrumentalities to be considered is before your Lordships' House this afternoon—at a season in our affairs on this day of national thanksgiving when we can feel entitled, and indeed are required, to look forward to what is to come after. It is, I hope, the first of several. Indeed, it cannot stand by itself. For it attempts to deal with one aspect only of the economic problem. Your Lordships will, I take it, this afternoon be concerned chiefly with the broad purpose and method of these proposals and not with technical details. The principal object can be explained in a single sentence: to provide that money earned by selling goods to one country can be spent on purchasing the products of any other country. In jargon, a system of multilateral clearing. In English, a universal currency valid for trade transactions in all the world. Everything else in the plan is ancillary to that. Serious tariff obstacles, though we may try to abate them, are likely to persist. But we may hope to get rid of the varied and complicated devices for blocking currencies and diverting or restricting trade which before the war were forced on many countries as a superimposed obstacle to commerce and prosperity.

Money Apportioned to the Scale of Trade

Now this universal currency is essential to the healthy trade of any country, and not least to our own, for it is characteristic of our trade that the best market for our goods are often different from our best sources of supply. We cannot hope to balance our trading account if the surpluses we earn in one country cannot be applied to meet our requirements in another country. We shall have a hard enough taskdevelop a sufficient volume of exports, but we shall have no hope of success if we cannot freely apply what we do earn from our exports wherever we may be selling them, to pay for whatever we buy wherever we may buy it. This plan provides for that facility without qualification. That is the main purpose. If, however, general facilities on these lines are to survive successfully for any length of time, it will be a necessary condition that there should be a supply of the new money proportioned to the scale of the international trade which it has to carry; and, also, that every country in the world should stand possessed of a reasonable share of that currency proportioned to its needs. The British plan proposes a formula intended to give effect to both those objects. There may be a better one, and we should keep an open mind, but the aim is clear.

It is not necessary in order to attain these ends that we should dispossess gold from its traditional use. It is enough to supplement and regulate the total supply of gold and of the new money taken together. The new money must not be freely convertible into gold, for that would require that gold reserves should be held against it, and we should be back where we were, but there is no reason why the new money should not be purchasable for gold. By such means we can avoid the many obvious difficulties and disadvantages of proposing that the old money, gold, should be demonetized. The plan proposes therefore what is conveniently described as a one-way convertibility. What shall we call the new money? Bancor? Unitas? Both of them in my opinion are rotten bad names but we racked our brains without success to find a better. A lover of compromise would suggest unitor, I suppose. Some of your Lordships are masters of language. I hope some noble Lord will have a better inspiration. What would your Lordships say to dolphin? A dolphin swims, like trade, from shore to shore. But the handsome beast also, I am afraid, goes up and down, fluctuates, and that is not at all what we require. Or bezant? The name, as the Financial Secretary to the Treasury recently recalled in another place, of the last international coin we had—the gold unit of Byzantium. In the same line of thought Professor Brogan has recently suggested talent, named after a place which perhaps we shall soon be in a position to regard as at our service. So far every bright idea in turn has been turned down. I fancy that our Prime Minister and President Roosevelt could between them do better than most of us at this game, as in most other games, if they had the time to turn their minds to writing a new dictionary as well as a new geography.

Initial Reserves

The plan, as I have said, allots to every country an initial reserve. That is a once-for-all endowment There is, therefore, a risk that the arrangements will break down because some improvident country runs through its stock of bancor and gold and has none left to meet its engagements. To provide against that is a very delicate matter, for it may seem to involve interference with a country's domestic policy. The plan provides in such case for consultation and advice. The country may be required to take certain specific measures. There remains in the background, if eventually unavoidable, the severe penalty of depriving the improvident country of any further facilities, which, after all, is the only effective remedy the private banker has, unless his client is actually fraudulent. It is most important to understand that the initial reserve provided by the Clearing Union is not intended as a means by which a country can regularly live beyond its income and which it can use up to import capital goods for which it cannot otherwise pay. Nor will it be advisable to exhaust this provision in meeting the relief andrehabilitation of countries devastated by war, thus diverting it from its real permanent purpose. These requirements must be met by special remedies and other instrumentalities.

The margin of resources provided by the Clearing Union must be substantial, not so much for actual use as to relieve anxiety and the deflationary pressure which results from anxiety. This margin, though substantial, must be regarded solely as a reserve with which to meet temporary emergencies and to allow a breathing space. But the world's trading difficulties in the past have not always been due to the improvidence of debtor countries. They may be caused in a most acute form if a creditor country is constantly withdrawing international money from speculation and hoarding it, instead of putting it back again into circulation, thus refusing to spend its income from abroad either on goods for home consumption or on investment overseas. We have lately come to understand more clearly than before how employment and the creation of new incomes out of new production can only be maintained through the expenditure on goods and services of the income previously earned. This is equally true of home trade and of foreign trade. A foreign country equally can be the ultimate cause of unemployment by hoarding beyond the reasonable requirements of precaution. Our plan, therefore, must address itself to this problem also—and it is an even more delicate task since a creditor country is likely to be even more unwilling than a debtor country to suffer gladly outside interference or advice. In attempting to tackle this problem the British plan breaks new ground. Perhaps its approach may be open to criticism for being too tentative and mild; but this, I am afraid, may be inevitable until these things are better understood.

Circulation of Deposits

But at this point I draw your Lordships' attention to a striking feature of the proposals. Under the former gold standard, gold absorbed by a creditor country was wholly withdrawn from circulation. The present proposals avoid this by profiting from the experience of domestic banking. If an individual hoards his income, not in the shape of gold coins in his pockets or in his safe, but by keeping a bank deposit, this bank deposit is not withdrawn from circulation but provides his banker with the means of making loans to those who need them. Thus every act of hoarding, if it takes this form, itself provides the offsetting facilities for some other party, so that production and trade can continue. This technique will not prevent excessive hoarding from doing harm in the long run, since this may cause other countries to suffer the anxiety of a growing debit account which would eventually reach its permitted maximum. But a country which tends to hoard bancor beyond all reason will at any rate be exhibited before itself and before the whole world as the make-mischief of the piece; and will be under every motive of reason and of benevolence and of self-interest to take corrective measures. Nor, I fancy, will the hoarding of bancor prove as attractive or as plausible as the burying of gold seems to have been, if recent experience is a guide.

I turn now to an aspect of these proposals which has rightly caused considerable anxiety to well-judging critics. We set up a universal money; we make sure that its quantity shall be adequate; we share it out between the countries of the world in equitable amounts; we take what precaution we can against improvidence on the one hand and hoarding on the other. It is obvious that in this way we establish an immensely strong influence to expand the trade and wealth of the world, and to remove certain disastrous causes of Inhibition and distress. But an obvious question arises. Are we doing this at the cost of returning, in effect, to therigidity of the old gold standard, which fixed the external value of our national currency beyond our own control, perhaps at a figure which was out of proper relation to our wage policy and to our social policies generally?

Exchange Rates

The exchange value of sterling cannot remain constant, in terms of other currencies, unless our efficiency-wages, and these other costs of production which depend on our social policy, are keeping strictly in step with the corresponding costs in other countries. And, obviously, to that we cannot pledge ourselves. I hope your Lordships will believe me when I say that there are few people less likely than I not to be on the lookout against this danger. The British proposals nowhere envisage exchange rigidity. They provide that changes of more than a certain amount must not be made unless the actual state of trade demonstrates that they are required, and they provide further that changes, when made, must be made by agreement. Exchange rates necessarily affect two parties equally. Changes, therefore, should not be made by unilateral action. We do indeed commit ourselves to the assumption that the Governing Board of the Union will act reasonably in the general interest, and will adopt those courses which best preserve and restore the equilibrium of each country with the rest of the world. That is the least we can do, if any form of agreed international order is to be given a chance. But if, in the event, our trust should prove to be misplaced and our hopes mistaken, we can, nevertheless, escape from all obligations and recover our full freedom with a year's notice. I do not think that we can reasonably ask any completer safeguards than that.

There is another question which can very reasonably be asked: Are we winning one freedom at the cost of another? Shall we have to submit to exchange controls on individual transactions which would be unnecessary otherwise? In this respect the plan leaves each country to act as it thinks best in its own interests, and imposes nothing. Or, rather, the only condition which is imposed is that there shall be absolute freedom of exchange remittance for current trade transactions. In the control of capital movements, which is quite another matter, each country is left to be its own judge whether it deems this necessary. In our own case, I do not see how we can hope to avoid it. It is not merely a question of curbing exchange speculations and movements of hot money, or even of avoiding flights of capital due to political motives; though all these it is necessary to control. The need, in my judgment, is more fundamental. Unless the aggregate of the new investments which individuals are free to make overseas is kept within the amount which our favorable trade balance is capable of looking after, we lose control over the domestic rate of interest.

The Chancellor of the Exchequer has made it very clear that the maintenance of a low rate of interest for gilt-edged loans is to be a vital part of our policy after the war as it has been during the war. For example, it is only if the rate of interest is kept down that the new housing we intend can be financed without excessive subsidy. But we cannot hope to control rates of interest at home if movements of capital moneys out of the country are unrestricted. If another country takes a different view of the necessities of the situation, it is free to do otherwise. The plan leaves each country to be the judge of its own needs. Those who are experienced in these matters advise that adequate control of capital movements should be possible without a postal censorship. I mention this to relieve a natural anxiety. Few of your Lordships, I expect, would stand for so gross an infringement on personal rights as a postal censorship in times of peace.

Not a Relief Scheme

There is one important respect in which the British proposals seem to be gravely misunderstood in some quarters in the United States. There is no foundation whatever for the idea that the object of the proposals is to make the United States the milch cow of the world in general and of this country in particular. In fact the best hope for the lasting success of the plan is the precise contrary. The plan does not require the United States, or any other country, to put up a single dollar which they themselves choose or prefer to employ in any other way whatever. The essence of it is that if a country has a balance in its favor which it does not choose to use in buying goods or services or making overseas investments, this balance shall remain available to the Union—not permanently, but only for just so long as the country owning it chooses to leave it unemployed. That is not a burden on the creditor country. It is an extra facility to it, for it allows it to carry on its trade with the rest of the world unimpeded, whenever a time lag between earning and spending happens to suit its own convenience.

I cannot emphasize this too strongly. This is not a Red Cross philanthropic relief scheme, by which the rich countries come to the rescue of the poor. It is a piece of highly necessary business mechanism, which is at least as useful to the creditor as to the debtor. A man does not refuse to keep a banking account because his deposits will be employed by the banker to make advances to another person, provided always that he knows that his deposit is liquid, and that he can spend it himself whenever he wants to do so. Nor does he regard himself as a dispenser of charity whenever, to suit his own convenience, he refrains from drawing on his own bank balance. The United States of America, in my humble judgment, will have no excessive balance with the Clearing Union unless she has failed to solve her own problems by other means, and in this event the facilities of the Clearing Union will give her time to find other means, and meanwhile to carry on her export trade unhindered.

There are really only two contingencies, in my opinion, which might lead the United States to accumulate a large balance of bancor—failure to maintain good employment at home, or a collapse of the enterprise and initiative required to invest her surplus resources abroad. Recent past history shows that in times of good employment in the United States her needs for imports is so large, and her surplus of available exports so much reduced compared with other times, that a surplus in her favor does not develop; it is only if she ceases to require imports and is pressing her exports on the world that that situation arises. Why should our American friends start off by assuming so disastrous a breakdown of the economy of the United States? Moreover, if there are temporary difficulties which take time to solve, no one will gain more than a creditor if this maladjustment is prevented from starting a general slump, which eventually reaches, by repercussion, the creditor himself. I repeat that no one is asked to put up a single shilling except for so long as he has no other use for it. There is a significant difference, I suggest, between a liquid bank deposit which can be withdrawn at any time and a subscription to an institution's permanent capital.

United States Treasury Scheme

The Motion relates to the proposals of the United States Treasury as well as to the British White Paper. Your Lordships will not expect me, nor would it be in place, to examine or criticize these proposals at any length, but there are a few remarks which I should like to make. The whole world owes to Mr. Morgenthau and his chief assistant, Dr. Harry White, a deep debt of gratitude for the initiativewhich they have taken. Public opinion on the other side of the Atlantic is not, I fancy, as well prepared as it is here for bold proposals of this kind, but that has not prevented the United States Treasury from putting forward proposals of great novelty and far-reaching importance. Most critics, in my judgment, have overstated the differences between the two plans, plans which are born of the same climate of opinion and which have identical purposes. It may be said with justice that the United States Treasury has tried to pour its new wine into what looks like an old bottle, whereas our bottle and its label are as contemporary as the contents; but the new wine is there all the same.

Some play, I notice, has been made with the idea that the voting power in the British proposal has been arranged in our own interest. Nothing, I can assure your Lordships, was further from our thoughts. The Chancellor of the Exchequer explained last week in the House of Commons that there is no reason to expect that the American formula, when it has been fully explained, will be unacceptable to us. Certainly to arrive at voting predominance by the use of a particular formula was neither an intention nor an essential part of our proposals. Again, the requirement in the American plan for a four-fifths majority will be found, if the paper is read carefully, to relate not to all matters by any means, but only to a few major issues. Whether on second thought any one would wish to allow a negative veto to any small group remains to be seen. For example, the American proposals might allow the gold-producing countries to prevent the United States from increasing the gold value of the dollar, even in circumstances where the deluge of gold was obviously becoming excessive; and in some ways, by reason of their greater rigidity, the American proposals would involve a somewhat greater surrender of national sovereignty than do our own.

A Possible Synthesis

The American plan requires the member States to provide so-called security against their overdrafts, a requirement which could certainly be met if it is thought useful; but the security in question only to a very small extent consists in an outside security in the shape of gold. It consists mainlyof an I.O.U. engraved on superior notepaper, better than would be the case, perhaps, under our own scheme. I have said that, if that is thought useful and worth while, it does not involve any particular problem. The American scheme, again, sets a maximum to the liability of a creditor member to hold a credit balance, and there again that is a provision which is equally possible, if it is helpful, on either plan. But what happens when a creditor reaches his maximum is, in the American paper, somewhat obscure. I have not the slightest doubt in my mind that a synthesis of the two schemes should be possible; but it does not seem advisable to attempt it until there has been time and opportunity to discover what the expert opinion of other nations and of all the world finds difficult or unacceptable in either scheme, and what it finds sensible and good. In the light of that opinion, the synthesis in due course should and must be attempted. I trust that your Lordships will wish the two Treasuries God-speed in their high enterprise. So ill did we fare in the years between the two wars for lack of such an instrument of international government as this that the resulting waste and dissipation of wealth was scarcely less than the economic cost of the wars themselves; whilst the frustration of men's efforts and the distortion of their life pattern have played no small part in preparing the soiled atmosphere in which the Nazis could thrive.

These Papers do not present a whole story, but only the first chapter. They do, however, make a start in framing a structure without which other measures cannot be well designed or fitted in. I would also suggest to those of your Lordships—and there are many—who have for years taken a particular interest in the evolution of international forms of government, that we here offer an essay of some importance in the new modes of international government in economic affairs, by means of which the future may be better ordered than the past. Neither plan conceals a selfish motive. The Treasuries of our two great nations have come before the world in these two Papers with a common purpose and with high hopes of a common plan. Here is a field where some sound thinking may do something useful to ease the material burdens of the children of men.