Some Aspects of American Foreign Economic Policy
CURRENCY MANIPULATION WILL NOT SOLVE BASIC ECONOMIC PROBLEMS
By WINTHROP W. ALDRICH, Chairman Board of Directors, The Chase National Bank of the City of New York
Delivered before the Executives' Club of Chicago, Chicago, Ill., September 15, 1944
Vital Speeches of the Day, Vol. XI, pp. 20-26.
AS the military power of the Axis crumbles, problems of peace rush upon us with compelling speed. They press for solutions and solutions cannot be deferred. In finding these solutions, the United States must play a leading role. Our economic and financial position will not permit us to evade this responsibility, even if we would. Our sources of raw materials, although heavily drawn upon, have not been seriously depleted. Our industrial plant, although now dedicated to the winning of the war, will, once the internal problem of reconversion has been solved, be greater and more efficient than ever before. We have been saved from the devastation which has visited a large part of Europe and Asia and from which Great Britain has suffered so heavily. We must not only participate in the difficult task of world reconstruction, but we must bring to this task a leadership commensurate with our material power. Our best efforts will be required if we are to create in the world a decent political and economic environment in which the arts of peace can flourish.
The Bretton Woods Conference
At the United Nations Monetary and Financial Conference held at Bretton Woods, New Hampshire, during July, we witnessed an effort to find a solution for certain international financial problems—those concerned with currency stabilization and long-term foreign investment. Important though these problems are, they logically come second in point of time to other questions of a political and economic character which beset the world. Such other questions include the political reconstruction of the nations which have been occupied by the Axis powers, the redrawing of the maps of Europe and Asia, the resettlement of populations, and the establishment of some form of international political organization to preserve peace. Closely allied to these problems are such basic economic questions as trade barriers, the reconversion of industry from war to peace, a reasonably full utilization of the labor supply by peacetime production, and the adoption of sound domestic monetary, credit and fiscal policies. Less urgent in their claim upon our consideration are problems of international currency stabilization and foreign investment.
The Bretton Woods conference met upon the initiative of the United States and, in extending the invitation, President Roosevelt made it clear that proposals adopted by the conference would not be binding either morally or legally on the governments represented. Any agreement reached would have to be referred to the governments of the signatory powers for adoption or rejection.
Problem of Currency Stabilization
Prior to the conference, the problem of international currency stabilization—the concern of the International Monetary Fund—had received much more consideration than that of international investment—the concern of the International Bank for Reconstruction and Development. Active discussion of monetary questions was initiated early in April, 1943, with the simultaneous release of two draft plans by British and American experts, commonly termed the Keynes and White plans.
Through the latter half of 1943 and the first half of 1944 the stabilization proposals of the Treasury experts were widely discussed and subjected to searching criticism and analysis. Innumerable articles appeared in scientific journals and in the daily press. A carefully prepared brochure on the subject, giving emphasis to the "key-nation" approach, was issued by the Economic Policy Commission of the American Bankers Association.About a year after the publication of the original White and Keynes plans, a Joint Statement by Experts on the Establishment of an International Monetary Fund was endorsed by representatives of certain of the United and Associated Nations. Although in structure the Joint Statement resembled the White more than the Keynes plan, in actual substance it showed close affinity to the British proposal.
Prior to the meeting at Bretton Woods, the American delegates to the conference were instructed by the President to adhere to the Joint Statement in formulating definite proposals for an international monetary fund. Modifications were to be permitted if they did not fundamentally alter the proposals. Thus, from the outset, the American delegation was committed to a particular monetary plan and was not free to work de novo on the problem and to consider an alternative approach. The same situation applied to the delegations of the other nations represented at the conference.
Problem of International Investment
As I have indicated, there has been less public discussion of the role of the proposed International Bank for Reconstruction and Development than of problems of monetary stabilization. In both the White and Keynes plans, statements were made that an investment institution would be required to provide credit for long-term economic development. It was not until November 24, 1943 that the United States Treasury released the preliminary draft of its proposals for such an institution. British experts issued no comparable plan. The American delegates to the Bretton Woods conference were not free to develop independently a plan for an investment bank. As in the case of the Fund, they received instructions that they were to be governed by the principles agreed upon by the American Technical Committee.
The International Monetary Fund
The stated purposes of the International Monetary Fund, which is to be engaged primarily in the purchase and sale of currencies, reveal that functions have been delegated to it which reach far beyond the problem of currency stabilization. The Fund is charged not only with the duty of promoting international monetary cooperation and exchange stability, but also with the duty of facilitating the expansion and balanced growth of international trade, and of contributing thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all member nations. The Fund is also charged with the duty of helping to correct maladjustments and of shortening the duration and lessening the degree of disequilibrium in the international balance of payments. In all of these respects the powers of the Fund seem to be obscure and uncertain.
The objectives of the Fund lack the focus essential to its success. They are so broad and so all-inclusive, that the Fund, if it were established, would probably become enmeshed in its own confused policy. For example, are its credit operations to be short- or long-term in character? Are they to be for purposes of currency stabilization or economic development? Are they to be of a commercial or an investment character?
Assets of the Fund
The Fund, which is to accomplish the diverse purposes set forth in the monetary agreement, is to have assets that will consist in small part of gold and in large part of non-negotiable, non-interest bearing demand obligations and currencies of member nations. These assets are to be supplied by each member nation in an amount equal to its quota, which varies from $500,000 in the case of Liberia and Panama to $2,750,000,000 in the case of the United States. Total quotas come to $8,800,000,000.
As a practical matter, it should be noted that the size of its quota is not so much a measure of a nation's contribution to the Fund as a measure of its access to the Fund's benefits. This point was fully recognized during the debates at Bretton Woods and gave rise to the unedifying spectacle of nations competing to obtain larger and larger quotas. Since the United States will have the least need to use the Fund's resources, our position becomes mainly that of a contributor, and by far the largest contributor.
The bulk of the assets of the Fund, perhaps 80 per cent of the total, will in all probability consist of the obligations of member governments and of deposits with the central banks of member nations. If the member country so decided, the first could be created by the printing press, and the second, by the simple expedient of book entries.
Obviously the assets created in this manner will not be of uniform quality. A few of the local currencies, including, we hope, the American dollar, may be convertible into gold, at least for foreign transactions. The majority will probably not be convertible into gold, and some may not even be convertible into goods because of the controls over export trade which will persist in many member nations. Inasmuch as the Fund gives nations with relatively poor currencies access on an automatic basis to relatively good currencies, the good currencies may be pulled down to the level of the poor currencies.
The gold holdings of the Fund, plus its holdings of those currencies likely to be in greatest demand, will, it is estimated, approximate $4,000,000,000. Of this amount, the United States will supply about 70 per cent. In other words, our relative contribution to the lendable assets of the Fund will be more than twice as large as our relative contribution to its total assets.
Credit Transactions of the Fund
For all practical purposes, the credit transactions of the Fund are to take place on a purely automatic basis. Credit transactions occur when a nation offers its currency in return for another currency in greater demand. A member will normally be allowed each year to sell its own obligations or currency to the Fund in an amount not exceeding 25 per cent of its quota and to continue to do so year by year until the Fund's holdings of its currency equal 200 per cent of its quota. Sales are to be consistent with the objectives of the plan, but these are so broad that few transactions would seem to be excluded.
Automatic borrowing provisions have from the beginning been an essential feature of the proposals of the Treasury experts. In the Bretton Woods proposal, as in former versions of the plan, the exchange of one currency for another is to be permitted on an automatic basis without reference to the credit worthiness, the internal budgetary situation, or the monetary or financial position of the applicant nation. There is no assurance that the currency acquired will be used intelligently, productively, or in such a way that foreign exchange will be provided for repayment.
Question of Exchange Stability
One of the stated purposes of the International Monetary Fund is to promote exchange stability. This is a laudable objective and one which must eventually be attained if international trade is to be given greatest encouragement and if international capital movements are to be promoted. Despite the emphasis on this particular objective, however, the plan includes liberal provisions for alterations in exchange rates. In consequence, the Fund in all probability will become a mechanism for instability rather than for stability. Member nations are free to propose changes in the initial par value of their currencies, if these are to correct a "fundamental disequilibrium." They must consult with the Fund on proposed changes, but the Fund may raise no objection based on the social or political policies of the member nation, even though such policies may have provoked the disequilibrium which induced the member nation to request the change.
If a proposed change, inclusive of all previous changes, does not exceed 10 per cent of the initial par value of a currency, the Fund may raise no objection. The requested change must be granted forthwith. If the proposed change does not exceed a further 10 per cent, the Fund may either concur or object, but it must render its decision within 72hours. If additional changes are requested, the Fund is given a longer period in which to state its attitude. Should the Fund not concur, is it likely that a sovereign power would continue its membership?
In addressing the House of Lords on similar provisions in the Experts' Proposals, Lord Keynes stated that "it is the duty of the Fund to alter the gold value of any currency if it is shown that this will be serviceable to equilibrium." He added that these provisions made the plan the exact opposite of the gold standard and confirmed and approved the dethronement of gold as the fixed standard of value in the United Kingdom.
The provisions of the plan permitting changes in exchange rates are so liberal that exchange depreciation would undoubtedly become an accepted and normal procedure in international financial affairs. Nations could employ exchange depreciation as a substitute for internal fiscal reform and for internal adjustments of costs and prices. Proposals for exchange depreciation from one nation would be quickly followed by similar proposals from others. All proposals could be made in the name of disequilibrium to which the Fund and the member nations would doubtless give an elastic definition.
Proposals for exchange depreciation would be inevitable since the plan attacks the symptoms rather than the basic causes of exchange instability. True exchange stability presupposes the absence of internal inflation and the existence of freely competitive forces. Commercial banking systems must be divorced from deficit financing, floating debts refunded, interest rates unpegged, and price and rationing controls removed. Then, and only then, can exchange rates reflect basic conditions and can true exchange stability be achieved. If these measures are not taken, a spurious exchange stability may exist, which for its maintenance will require frequent recourse to the Fund or reliance on trade controls not less severe than those enforced in Nazi Germany prior to the outbreak of war.
Question of Exchange Controls
Another stated objective of the monetary plan is to bring about the removal of exchange controls on current account. Laudable as this objective is, it is extremely doubtful whether the Fund itself will be able to succeed in this purpose. By the provisions of the plan, exchange controls on current account are permitted through the transitional period, a phrase which is not precisely defined. The plan simply requires that a member nation consult with the Fund, beginning the fifth year following its organization, concerning the retention of such restrictions. In exceptional circumstances the Fund may make representations that conditions are favorable to their removal. In making such representations, however, the Fund must give the member nation the benefit of any reasonable doubt.
Not only are nations permitted to maintain exchange controls on current account through the transitional period, but they are also permitted to impose restrictions on current account which did not previously exist, provided that a particular currency is declared "scarce." Moreover, member nations may permanently maintain exchange controls on capital transactions, which are often not easily distinguishable from current transactions.
The Fund, of course, lacks the power to effect the removal of trade controls. These may be continued indefinitely and, to the extent that they are continued, any effort towards the removal of exchange controls on current account may be nullified.
Financial Contribution of the United States
The financial contribution of this country to the Fund will consist not only of our quota of $2,750,000,000 but also of any additional advances that we may make. Our ultimate financial contribution cannot at the present moment be determined. This will depend upon the demand for American dollars, which it is generally assumed will be heavy and which, in the course of time, may exhaust our quota contribution and require the supplying of additional American currency to the Fund.
If the demand for dollars proves sufficiently strong, the Fund will eventually be confronted with the necessity of invoking Article VII of the agreement and of declaring the dollar a scarce currency. Now this section has particular pertinence to the United States, for, as the London Economist declared, the term "scarce currency" must be taken to mean the American dollar since "there is no other currency in the world where the risk of scarcity is so great." If the dollar is declared a scarce currency, member nations are permitted to impose general exchange restrictions on dollar transactions, In referring to a somewhat similar provision in the Experts' Proposals, Lord Keynes declared, in effect, that this action would release countries from the obligation of taking American exports or, if taken, of paying for them.
These economic sanctions are of such a character that Lord Keynes doubted whether any nation would permit them to be put into effect. He concluded that a creditor nation on the "imperative grounds of its own self-interest" would always find "a way to square the account." To avoid recourse to these provisions the United States might hasten to extend loans to the Fund, an action which might lead to domestic inflation. This result, Lord Keynes implied, is not undesirable, apparently because credit expansion and inflation in creditor nations prevent deflation in debtor nations. Just why inflation in creditor nations is preferable to deflation in debtor nations has never been made clear.
An Appraisal of the Fund
One cannot study the Bretton Woods proposal for an International Monetary Fund without coming to the conclusion that many of its provisions and purposes are basically contradictory. The Fund wavers between the objectives of currency stabilization and economic development. Emphasis is given to the need for currency stabilization, yet currency depreciation is made an easy and normal process. In England, the proposal is termed the opposite of the gold standard; in the United States, a further application of the gold standard. Credit extensions by the Fund are to be made on an automatic basis and for a great diversity of purposes. In consequence, the Fund's assets may eventually take the form of long-term, non-self-liquidating credit grants. Good currencies will have been depleted in support of poor. I am convinced that the plan, in the course of time, will offer another illustration of the operation of Gresham's Law, which, as you know, is simply the familiar rule that bad money drives out good. But, in this case, the currencies of the world would be weakened, and the stabilization attained through this means would seek the lowest level.
The International Bank for Reconstruction and Development
According to a statement by Lord Keynes, the idea of the International Bank for Reconstruction and Development originated in the United States Treasury. As its title implies, the purpose of the Bank is to finance reconstruction anddevelopment. Emphasis was laid on each objective at Bretton Woods in order to meet the desires both of those delegates whose countries had been devastated by the enemy and those whose countries had not been invaded.
Credit Operations of the Bank
Once it has been organized, the Bank is permitted to make direct loans out of its own funds, to make or to participate in direct loans from borrowed funds, and to guarantee, in whole or in part, loans made by private investors. The limit placed on total loans and guarantees is 100 per cent of unimpaired subscribed capital, reserves and surplus. Apparently, it is contemplated that the major part of the Bank's operations will consist in the guaranteeing of securities.
In its credit operations, the International Bank for Reconstruction and Development must require that loans be guaranteed by a member nation or by an acceptable agency, must be convinced that the funds cannot be obtained at reasonable rates in the private investment market and must give due consideration to the ability of the borrower or guarantor to repay the loan. Credits are to be extended for specific purposes and only after a competent committee has rendered a favorable report. If the safeguards inherent in these provisions are strictly observed, the question arises whether the subscribed capital of the Bank ($9,100,000,000) might not be too large. This same point was made by the London Economist when it inquired whether there were many loans safe enough to meet these standards and yet not safe enough to float in the private market.
The scope of the Bank's operations will doubtless depend upon the interpretation given to the provisions which I have cited and, in particular, upon the definition of reasonableness of charge as applied to interest rates prevailing in private capital markets. The American proponents of the plan apparently are of the opinion that the facilities of the Bank will be used, especially in the immediate postwar period. Surely if Treasury officials were of the belief that the Bank would not be used extensively, they would not have originated and given support to the proposal.
The International Bank for Reconstruction and Development has particular pertinence to the United States. To the extent that its facilities are used, both direct and guaranteed loans, certainly in the beginning, will be extended mainly in the form of dollars. While the approval of the American Executive Director must be obtained before the Bank may use the dollars initially paid in, before the Bank may make dollar loans from funds borrowed in this country and before the Bank may guarantee loans floated privately in this market, it is obvious that refusal would be difficult. Failure to grant such permission would cramp, perhaps even suspend, the Bank's operations and would, in addition, provoke bitter international recrimination and dissension.
Capital Exports and the Balance of Payments
There are many questions which must be answered before this country can decide to become a stockholder in the Bank. The first concerns the general and yet very fundamental question of the effect upon the international balance of payments of a large volume of loans granted to foreign borrowers. I raise this question because the advocates of the plan apparently are convinced that the establishment of the Bank will lead to large capital exports from the United States and that large capital exports are an indispensable means of maintaining employment in this country and of reconstructing and developing the economic systems of other nations.
My own opinion is that capital exports on a large scale are not required under present circumstances and will be detrimental to debtor as well as to creditor nations. Most of the capital for domestic reconstruction and development should come from local sources. Local labor and local materials should be relied upon to the greatest possible extent in rebuilding devastated areas and in the industrialization of undeveloped regions. Foreign funds should be used sparingly and only where their use will create foreign exchange for the repayment of the loan. If foreign funds are used when local capital is available, a needlessly heavy burden is placed on the debtor's balance of payments. Capital accumulation, like currency stability, is largely a product of domestic policy.
Unless capital exports are kept at a minimum and are limited to projects which produce foreign exchange, debtor nations may resort to the International Monetary Fund to meet interest and perhaps even a portion of the amortization payments due on foreign borrowings. In this event we may find ourselves supplying dollars to the International Monetary Fund in order to enable borrowing nations to service their dollar debts to the International Bank for Reconstruction and Development.
Relation to Export-Import Bank
A second question of a less general nature concerns the relationship of the proposed Bank to existing governmental institutions. What, for example, is to be its relationship to the Export-Import Bank? The suggestion has been made that the facilities of the Export-Import Bank, with expanded borrowing power, could still be employed. If this new institution is established, is the Export-Import Bank required? Exactly what function will it serve? And if both institutions function, what will be the aggregate volume of foreign credits which this nation may find itself extending either directly or indirectly?
Advisability of Direct Loans
A final question has to do with a fundamental point in international policy, namely, whether in the postwar period the United States Government should extend long-term dollar loans indirectly through an international bank, or directly through one of its own agencies. This question is based on the premise, which I accept, that our Government will itself be called upon to make a moderate volume of foreign loans in addition to our contributions to the United Nations Relief and Rehabilitation Administration. According to its advocates, the advantage of an international institution is that risks are shared. But it is difficult to see how this advantage can exist inasmuch as the bulk of the free assets of the proposed Bank are provided initially by the United States and inasmuch as the majority of the loans will be floated in this market.
I am convinced that to the extent that our Government feels called upon to make foreign loans, these should be granted through the Export-Import Bank, which has accumulated valuable experience in foreign credit operations. The loans extended should not be large and need not be large in view of the volume of dollar assets held by many foreign nations.
An Alternative Approach
In my opening remarks I suggested that political and economic problems take precedence over those of an international financial character. International financial questions are extremely important and must eventually be solved, but to attack them first may cause us to lose sight of the more basic problems.
The Bretton Woods proposals are no substitute for the real job of economic reconstruction. They are unrealistic and unnecessarily complex. They are unrealistic in their implied assumption that the creation of credits, the counterpart of the creation of debts, will, in the absence of appropriate fiscal, credit and commercial policies in each member nation, solve the complicated international monetary problems which beset the world. Their technical provisions are needlessly complex, a defect which stems in part from the fact that more fundamental problems remain unsolved.
The All-Important Problem of Trade Barriers
The all-important economic problem of the postwar world is the removal of trade barriers. One of the general resolutions of the Bretton Woods conference gave recognition to the problem but detailed consideration, even if the delegates had been so inclined, was precluded by the fact that the conference was called to formulate plans for a Fund and Bank.
Prior to this war, international trade was hampered not only by various tariffs but also by arbitrary import quotas, regional preferences, linked utilization arrangements, bilateral barter agreements, import monopolies, export subsidies and arbitrary customs procedure. Unless the channels of international trade are reopened, currency stabilization and foreign investment will rest on an ephemeral basis. The world will have been lulled into a false sense of security. We shall have the shadow of stability without the substance. We shall eventually realize that the solution of our basic economic problems has become infinitely more difficult. Perhaps the most dangerous aspect of the Bretton Woods proposals is that they may serve as an obstacle to the immediate consideration and solution of these basic problems.
Atlantic Charter on Trade Barriers
In two important documents, the United Nations have solemnly committed themselves to the immediate removal of trade barriers. The first was the Atlantic Charter and the second, the Master Lend-Lease Agreement. President Roosevelt and Prime Minister Churchill agreed in the fourth article of the Atlantic Charter that they would endeavor "with due respect for their existing obligations, to further the enjoyment by all States, great or small, victor or vanquished, of access, on equal terms, to the trade and to the raw materials of the world which are needed for their economic prosperity." It is interesting to note that Sumner Welles in his recent volume, "The Time for Decision," states that the well-known reservation, "with due regard for their existing obligations," was inserted at the insistence of Mr. Churchill, in order to take care of "what it was hoped would be merely temporary impediments to the more far-reaching commitment originally envisaged in that article." Mr. Welles quotes Mr. Churchill as stating that while he himself opposed imperial preference and favored the liberal trade principles of the latter half of the nineteenth century, "he was not empowered constitutionally to enter into any commitments of this character without the consent of the other members of the British Commonwealth of Nations."
Lend-Lease and Trade Barriers
The Master Lend-Lease Agreement signed by the Governments of the United States and the United Kingdom provided in Article VII that, in the final determination of the benefits to be provided, "the terms and conditions thereof shall be such as not to burden commerce between the two countries, but to promote mutually advantageous economic relations between them and the betterment of world-wide economic relations. To that end, they shall include provision for agreed action by the United States of America and the United Kingdom, open to participation by all other countries of like mind, directed to the expansion, by appropriate inter, national and domestic measures, of production, employment and the exchange and consumption of goods, which are the material foundations of the liberty and welfare of all peoples; to the elimination of all forms of discriminatory treatment in international commerce, and to the reduction of tariff and other trade barriers; and, in general, to the attainment of all the economic objectives set forth in the Joint Declare tion [the Atlantic Charter] made on August 12, 1941, by the President of the United States of America and the Prime Minister of the United Kingdom." Identical or similar Lend-Lease agreements have been signed with practically all of the United Nations.
Need to Implement Commitments
The time has come to implement the solemn commitments contained in the Atlantic Charter and in the Lend-Lease Agreements. Unless tariffs are substantially reduced and other trade barriers are eliminated now, and unless all nations are given equal access to the trade and raw materials of the world, the economic basis for currency stabilization or international investment will not exist.
I suggest that the plans advanced at the Bretton Woods conference should not be adopted by the United States. I propose instead, that the United States, the United Kingdom and other members of the British Commonwealth of Nations enter into immediate conversations on such problems as tariff barriers, imperial preference, export subsidies, bulk purchasing and regional currency arrangements. Our own delegation to this conference should include leaders of the majority and minority parties in Congress so that the decisions reached will be assured of Congressional support.
The success of such a conference will depend in no small measure upon the attitude of the United States. We must be prepared to effect substantial reductions in our tariff rates, We must convince the world of our sincerity of purpose. The quality of our leadership may easily determine whether the world will move towards free enterprise or towards collectivism. Never shall we have a better opportunity to reduce trade barriers than in the period of transition from war to peace, when the markets of the world, including our own, will be short of goods, and the exportable products of every country will be in great demand. Under such conditions tariff reductions should be feasible, not only because protection for domestic markets becomes less necessary, but because payment for exports must in the long run be made in imports. Credits, however generously given, must ultimately be balanced in terms of goods received or in losses taken.
England's Postwar Financial Situation
If the proposed conference proves successful, and it will if there is a readiness to make reciprocal adjustments and to seek international solutions for international problems, then I propose that the United States go as far as possible in making common cause with Great Britain and the British Commonwealth of Nations in meeting their financial needs arising from the war. Financial assistance would thus follow the joint modification of trade barriers, both of which art essential to the stabilization of the dollar-pound rate and to the subsequent stabilization of world currencies.
England's postwar financial situation is complicated two problems, the one associated with her balance of payments and the other with the wartime accumulation of blocked balances. We can assist in the solution of the first problem; England plans to solve the second by direct negotiation with the creditor nations.
Grant-in-Aid to England Proposed
England's difficulties in connection with her balance of payments will persist until she has been able to reconvert her industries and to reestablish connections with foreign purchasers of her products. In the meantime, she will need foreign funds in order to import food and essential raw materials. Before the war Britain would have been able to pay for many of these essential imports by utilizing the return on her foreign investments, or, if need be, by selling part of them. But those foreign investments are now greatly reduced. Lend-Lease did not come into effect until Britain had already been serving as the bastion of democracy through a period of about a year and a half. During that time she spent a very large sum of money in this country, converting the resources of her citizens into dollars to support her armies and her people. If Lend-Lease had then been in effect, we would have provided many of the things she was forced to buy. Without attempting to estimate the benefits she would have thereby obtained, I propose that in lieu of a retroactive application of Lend-Lease, and as an essential element in world economic reconstruction, the United States provide England with a grant-in-aid sufficiently large to establish stability between the dollar and the pound. The sum needed may be a large one—but. the problem is large and we must show courage in its solution. It should be borne in mind that my proposal rests upon the assumption that the trade conference has proved successful, that both England and the United States shun totalitarian tactics in international trade, and that both give full support to the principles of economic liberalism.
Stabilizing Other Currencies
Once the dollar-pound rate is stabilized, attention can and should be directed immediately to the stabilization of other currencies. The prerequisites are internal political stability, a constructive solution of the problem of trade barriers, a reasonable measure of economic well-being and the absence of inflation. Once the political and economic prerequisites are attained, the financial problem of currency stabilization becomes relatively simple. Many nations possess sufficient assets in the form of gold and dollar or sterling exchange to stabilize their currencies without external financial aid—a fact which seems to be widely overlooked. Only a few nations will have to seek outside financial assistance.
Certain of the nations, which will have to borrow for purposes of currency stabilization, will probably not be able to do so in the private market. I suggest, therefore, that the Export-Import Bank be given increased borrowing powers, so that it will be in a position to grant long-term stabilization loans of a meritorious character. Along with these increased responsibilities, the Export-Import Bank, in accordance with my earlier suggestion, could be given the power to extend intermediate and long-term reconstruction and development loans to foreign borrowers where funds for productive purposes could not be obtained privately. If it be desired to spread the risk of such loans among several responsible nations interested in particular projects, it should be possible to arrange a collective guarantee. Loans of this type, you will recall, were made in the reconstruction period after World War I.
A Bank of Central Banks
Finally, once the dollar-pound rate is stabilized, consideration can be given to the desirability of organizing an international institution, where central bankers can meet regularly to discuss monetary and credit problems of mutual interest. The initiative in the organization of such an institution could be taken by our own Federal Reserve Banks. Its capital stock would be owned by central banks and would be paid for entirely in gold. If international trade is moving freely, the bank's capital would not need to be large to accomplish the purpose of the institution. International trade will move freely if the proposed trade conference with the United Kingdom and the other members of the British Commonwealth of Nations proves successful and if other nations follow our joint leadership.
The objectives of this new institution would be simple and definite. It would extend short-term seasonal stabilization loans to central banks, serve as a genuine clearing house for central banks, advise nations on monetary and credit problems, collect and distribute pertinent statistics, and make research studies. Its influence would be exerted by persuasion, not coercion.
Inter-Governmental War Debts
Implied in what I have said is the thought that the problem of the economic reconstruction of the world will largely devolve upon the United States. We can exercise constructive leadership not only by initiating and sponsoring the reduction of trade barriers, but also by lifting from the international economy the burden of inter-governmental war debts. These debts serve only to retard economic reconstruction and to muddy political waters. As a further impetus, therefore, to world reconstruction, we must be willing to cancel the inter-government debts remaining from World War I, to repeal the Johnson Act of 1934, and to follow a liberal and even generous policy in connection with the settlement of the Lend-Lease obligations due to us in World War II.
Prerequisites for a Stable Dollar
Also implicit in what I have said is our responsibility to establish a currency in the post-war period in which other nations can have confidence and in terms of which they will be willing to conduct their trade. This will not prove easy. The road back to sound currencies is difficult economically and seldom popular politically. We must be willing to repeal all silver purchase legislation, to repeal the Thomas Amendment of 1933 and to repeal Sections 8 and 9 of the Gold Reserve Act of 1934, which allow the buying and selling price of gold to differ from the gold content of the dollar. We must unblock the dollar assets of foreigners as rapidly as political considerations permit. The dollar must be free of all foreign exchange controls. We must ultimately balance the Federal budget and refinance the Federal floating debt. Without these measures, we cannot stablish the dollar as an international currency.
To promote well-being abroad as well as at home, the United States also has the responsibility of achieving a reasonably high level of national income and of avoiding the excesses of boom and, in consequence, the dangers of depression. The attainment of a high level of national income will depend to a considerable extent upon governmental policies in the fields of taxation, labor and corporate regulation. The avoidance of boom and of subsequent depression is largely a matter of preventing postwar inflation. If we succeed in achieving these objectives, the United States will offer a good market for foreign products and will not prove a disturbing factor in other economies.
Currency Manipulation No Solution
In closing, I wish again to give emphasis to the fundamental truth that credit extension cannot serve as a substitute for the adoption of appropriate commercial policies.
For this reason it is unfortunate that so much time and energy were given to the Bretton Woods proposals rather than to the main task of economic reconstruction. Currency manipulation will not solve the basic economic problems of a war-ridden world. Once a solution of fundamental problems has been effected, the stabilization of currencies and the extension of international loans will become integral parts of the over-all pattern of world reconstruction.