A DOLLAR-STERLING STANDARD
By LEON FRASER, President, First National Bank of New York
Delivered at the New York Herald-Tribune Forum, New York City, November 16, 1943
Vital Speeches of the Day, Vol. X, pp. 157-158.
MRS. Reid, members of the Herald-Tribune Forum, this will not all be in Basic English. It is on the question of Mrs. Reid's suggestion of reconstructing international money. What is international money? Why do we need it? How shall we reconstruct it?
Despite its pretentious ring, international money, though difficult to obtain, is not difficult to define or to understand, It is a money that will be accepted internationally as a satisfactory means of payment in transactions between peoples in different nations. To be so accepted it must be a strong and a stable money, relied upon by business and financial men in the leading commercial centers. It must be the pivot to which the currencies of the principal trading nations are attached. It can operate successfully only in a peaceful world—one in which preventive barriers to foreign trade are not the rule.
There is nothing magic about international money. We have had it before. Above all, it is not some mysterious, newly invented currency of a super-national character and of universal use—a concept so attractive to theorists. Proposals of this type are premature because they depend upon the existence of a world government and of world economic and financial unity. An artificial unit, such as a bancor, might fiord a uniform accounting system. But the question in what tual money to discharge obligations would still remain. It better to have a money that is a stable unit of account and also a serviceable medium of international payment.
Pound Sterling Cited
For a century before the world war, such a medium was at hand. Substantially, it was gold. National currencies could be quickly computed in terms of gold. Gold was and is universally in demand as a means of payment. But man was much too ingenious to rely on the cumbersome method of physically delivering gold—save on special occasions. The real international money was the pound sterling, linked to gold but managed by the Bank of England. International trade and finance, largely expressed in sterling, cleared through London. If the clearings were not equal, the creditor would usually retain a sterling credit because he could buy with sterling what he wanted, where he wanted, when he wanted it.
The aftermath of the World War I, the crises of the '30s, and the advent of World War II, has displaced sterling as an eligible international money. And the notion has been disseminated that gold is no longer internationally suitable; in part, because much gold is concentrated here in the United States. Yet we must again possess some international money in order to restore and develop expanding commercial and financial relationships between nations. Without these, talk of higher standards of living are all in vain.
How do we reconstruct international money?
Lately two plans for a global international institution to stabilize currencies have been offered. I am skeptical of both in their present form and under immediate post-war conditions because they are over-grandiose and over-simple at the same time. An international bank we should have, but it should develop out of the facts of present world finance and trade rather than out of an abstract blueprint. It must not
cloak the truth that in the sphere of international trade and money the two predominant nations now are the United States and Great Britain. They are the key commercial nations, whose policies will make or break any currency stability.
Several national currencies are also connected by tradition and trade with the pound or the dollar. The first effective step toward an international money lies in an Anglo-Saxon financial understanding and not in some universal approach, which glosses over the fact that the prerequisite to international stability is internal stability. Unless sterling and the dollar reflect sound conditions at home, including therein the amount of the external debits or credits, they cannot be sound abroad; nor can there be any other trustworthy international money because so much depends upon a strong dollar and a strong pound.
Britain Problem No. 1
Certain conditions exist in Great Britain today that militate against the pound. I refer to the large volume of external financial obligations created by our ally in this joint war. After the conflict, Great Britain will constitute the world's financial problem No. 1. In our own interest, as the principal creditor nation, we should help restore Great Britain to a position of balance in her international accounts.
Today the dollar, re-anchored to gold, is the strongest currency on earth. It can serve as the regulator of international money. But the sun never sets upon the economic influence and the far-flung use of sterling. As the international money of tomorrow I propose a dollar-sterling standard to which the nations shall be invited to repair. In the first instance, Russia and China should be asked to join. The basis behind such a dollar-sterling standard would continue to be gold. The exchange rates between the two moneys would be muItually fixed by the respective governments and then protected against temporary derangements during the post-armistice transition period by the exchange controls and by the use of our ample gold stock until Great Britain is more nearly in equilibrium.
Experience might demonstrate that the exchange rate first chosen did not expedite equilibrium. Continuous consultation between the authorities would demonstrate the necessity, if any, of change, and would help shape policies that would achieve internal and external stability. These consultations should start at once. The rigidity of the old gold standard would be avoided by continued active management of the monetary mechanism with the goal of high production. But the ultimate foundation would remain gold.
The return to a modified international gold standard is easier than before the war. This struggle is rapidly redistributing gold. Today the 1943 dollar value of the gold possessed by countries other than the United States is greater than the 1929 dollar value of all the gold then in the world, including the United States. True, we still have the major portion, but the new techniques of money management require less gold than heretofore. Yet, make no mistake: we cannot have any enduring international money without discipline. Basically, each country must work out its monetarysalvation by its own efforts, but America can lead by good example and by generous aid.
With a view to reconstructing international money, we should enter into a stabilization agreement with Great Britain, open to the adherence of other countries, which would include:
(a) A credit to Great Britain in the form of a call on gold in the amount of, say, five billion dollars, on the understanding that neither nation would engage in competitive exchange depreciation and that the dollar-sterling exchange rate would be fixed by mutual agreement. Such a credit would constitute a constructive use of some of our surplus gold.
(b) Formal cancellation of the remaining unpaid balance of the British war debts of World War I.
(c) Provision for a moratorium for a period of five years of any post-war lend-lease repayments involving transfers out of Great Britain any repayments thereafter to be limited to the return to the creditor, of the same commodity as was shipped.
(d) An understanding that both countries would eschew economic domination and would pursue international economic policies designed to promote stability of currencies inother nations. This means that we must act like a creditor nation, encouraging imports of goods and exports of capital.
(e) An agreement to reorganize the Bank for International Settlements on a wider basis in a different situs, and to use it as a center of international monetary consultation and planning, as a common agency for the joint action of treasuries and central banks in simplifying international clearings, and for dealing with the various monetary problems of the nations as they arise, including the granting, against proper commitments, of temporary stabilization credits to smaller nations. We should build on the experienced machinery that we have instead of creating elaborate new machinery. But it is necessary to dispel the illusion that any international instrument can work miracles or bring about stable currencies in an economically anarchic world.
This proposed Anglo-Saxon agreement would be but the nucleus of a wider pact which many associated nations would join forthwith and others as rapidly as may be. It is a fertile beginning and not the ultimate goal. This program may seem modest, yet, coupled with the other necessary measures of relief and rehabilitation in the war-torn countries, and for reopening the channels of international investment and commerce, this realistic approach represents the best entry on the road toward the reconstruction of a real international money.