Against the Tide

XVI

World Without a World Monetary System*

Were it not for the pitch-black storm clouds of world politics gathering about Berlin at the moment and overshadowing all else, it would be much more evident that the aspirations, cares, and dangers centered on the problem of international monetary relations have assumed a degree of importance almost without parallel. The debate sweeps along this way and that, one project after another keeps cropping up, and it almost looks as though the economists and financial experts of our time were all possessed by the novel ambition of having their name associated with some “plan” of international monetary reform. It would be astonishing if a clear view of essentials had prevailed in all this, although it may be hoped that the mists will eventually disperse. But the landscape we shall then see does not promise to be bright and sunny. As things are at the moment, the author’s modest intention is not to propose a new “plan,” but to mark out a few points of orientation in this confusing debate.

On more than one ground it seems reasonable to begin with the revaluation of the German currency, which was rightly hailed as a dramatic event a few months ago not so much because of its extent, which was modest enough, as because of the principle involved. To be sure, there were critics at home and abroad who opposed this measure and who, once it had been carried out against their opposition, condemned it; but even among them there must be few today who would refuse to admit that it sprang from a compelling and irresistible logic, such as is seldom found in economic policy. Even the bad losers among these critics, who, with a somewhat defective logic involving them in contradictions with their former rejection of revaluation, reproached it for not being sufficiently effective, must in all honesty ask themselves what would have happened without revaluation in a situation of continuing balance-of-payments surpluses, virtually no diminution in the overheated temperature of the boom, and strongly rising wages.

But by and large nobody seems much inclined to indulge in such skirmishes after the event. The subject of revaluation has passed into history with a speed that is all the more astonishing in view of the urgency with which the measure was needed and the relief it brought. Of course, it would be wrong to say that it is already forgotten, though even that would be no surprise in the giddy pace of our time. The almost complete calm on this battlefield so hotly contested not long ago reflects, among other things, the attitude of the erstwhile opponents; the champions of revaluation are not in a mood of noisy exultation, given that the one and only fireworks display turned out to be rather meager, and on the other side there is even less inclination to court ridicule by denying the salutary effects of revaluation. Another point that certainly counts is that just because revaluation was opposed so vociferously, aggressively, and stubbornly and therefore was carried out only so late and in such a small dose, it was welcomed by the people with all the more gratitude and made an impression that promises to be lasting. That is of the greatest importance at the level of politics and morals. But it does nothing to alter the fact that no more shots are fired on this front.

For this there is a special and profound reason, and it brings us to the heart of the matter. Even the advocates of revaluation always knew that it could not be a once-and-for-all gesture by which to throw open the door to a paradise of lasting equilibrium and secure protection against imported inflation. Nobody could nurture illusions that it would be more than a provisional answer to a much more far-reaching and serious problem. That problem, which was behind Germany’s imported inflation and after revaluation still awaits a solution, has come to the forefront in all its clarity and gravity now that the provisional answer has been given and recognized as provisional. It is the problem of the, in the long run, intolerable inadequacy of the international payments system. To say it even more plainly, the problem consists of the fact that a number of essential tasks to be fulfilled by an international monetary system either are not fulfilled or are done inadequately. The world possesses no world monetary system, not even in its noncommunist better half, or none worth the name. This, of course, has been the case ever since the previous world monetary system, the only one that ever existed in our historical era, that is, the gold standard, was swept away by the whirlpool of the Great Depression thirty years ago, having already undergone dangerous denaturation after World War I by being reissued, as it were, in the cheap, popular edition of the Gold Exchange Standard. But all this has become clear only now.

We had, after all, to consider one thing after another and to cross each bridge as we got to it. It is not so long ago that we had to count ourselves fortunate if only we managed to remove some of the very worst obstructions in international payments, above all, exchange control, and thus to reintroduce the conditions of a reasonably free and multilateral international economy. Hard battles had to be fought sometimes until, through a series of stages, among which the European Payments Union was outstanding for all its interim nature and defects, convertibility was finally achieved for most of the major currencies, albeit in different degrees of perfection. This was inestimable progress, but as and when it came to pass, it inevitably threw into relief the fundamental defects of the international monetary system. These defects were never in doubt from the outset, of course, and now, when the re-establishment of convertibility or the degree of its perfection puts them plainly in evidence, it would be foolish to indulge in a more or less shamefaced nostalgia for the good old days of inconvertibility and exchange control, and to blame these defects on the convertibility at long last achieved once more in at least acceptable, average degree. If I break my leg and eventually am well enough to walk again, it would be silly if, in view of the dangers to which I am now exposed in street traffic, I pined for the idyllic days when I had to keep to my bed. If I am run over now, it is not my successful recovery that is to blame, but the lack of traffic discipline.

But what is it all about? Where are the problems? These are the questions that should be put first, and it is the frequent failure to do so sufficiently firmly that is one of the main reasons that the current debate is so confused, as I indicated earlier. It does indeed suffer to an unusual degree from one person talking of one thing and another of some other thing, with no agreement as to what particular problem is to be discussed at any given moment. It is true that there is probably a broad consensus of opinion nowadays about what the basic trouble is, to wit, the plain fact that we have no international monetary system, in the sense that we had one in the days of the gold standard, and that since the latter’s demise we never managed to replace it by anything that could take over its functions. This is an uncontestable fact, however much we may reject any return to this model as foolishly Utopian, and however superior a smile we may affect when we meet one of the rare, benighted personalities who thinks that the door to this paradise is not hopelessly bolted and barred. It still remains a fact, and it would be a good thing if everybody at last admitted it openly.

But what do we mean by saying that there exists no international monetary system? What are the problems that have to be solved if we are to have such a system again? This is where the semantic confusion begins. To begin with one of the “plans” most often mentioned today, the Triffin Plan, it is clear that its originator primarily has in mind a problem of a particular kind, the problem of what we call international liquidity. He regards it as the most serious and the most urgent, because in his view the leading reserve currency, the dollar, needs to be relieved of a burden that threatens to impair either the American payments position or international liquidity. If the U. S. runs a deficit in the balance of payments, as it has been doing in recent years, the rest of the world, to the extent that it registers corresponding balance-of-payments surpluses, receives an injection of additional liquidity. In parentheses, it should be stated that the American deficit is not, as many seem to think, due to the dollar’s being the leading reserve currency, but to the external equilibrium of the American economy’s having been upset for various reasons, which include, above all, inflation in the United States too strong in relation to the shift in international competitive strength and to inflation in Europe. But let’s return to the main argument. Conversely, if the U. S. external deficit is eliminated by a change in its causal factors, Washington can indeed heave a sigh of relief, but international liquidity is squeezed. To put it in a nutshell, the blanket is too short and has to be lengthened. This could be done by raising the price of gold, and up to this point the idea of the Triffin Plan does in fact hardly differ from certain notions of the champions of a higher gold price. The special feature of the Triffin Plan is that it proposes to replenish international liquidity not by the simple method of raising the gold price, but by international book assets.

International liquidity certainly is a genuine problem. That much should be generally admitted. Central banks need a mass of maneuver to act as a buffer against the continuous shocks emanating from the balance of payments. One can even go further and grant it as probable that the liquidity base of today’s world economy has, in view of the extraordinary growth of its payments flows, become so narrow that, following the absolutely desirable normalization of the American balance of payments, it may indeed give rise to that serious problem that the author of the Triffin Plan assumes in common with the advocates of an increase in the gold price and with the authors of several other plans. But it needs to be added at once that, while the problem of international liquidity as such must be taken seriously, it is by no means a simple problem.

It is not easy to define the idea in such terms as to forestall its abuse. There is, for instance, the question of how to decide whether the balance-of-payments difficulties of any particular country involve a genuine liquidity problem, as seems to be assumed in the case of the stand-by credits in support of sterling, or are simply a reflection of that country’s continuously “living beyond its means” and in the name of liquidity asking that the payments gap for which it is itself responsible be plugged up by the solvent countries, which indeed is what the mechanism of the European Payments Union amounted to for years. Every banker knows the type of client who asks for a short-term credit to tide him over a momentary “illiquidity,” whereas in fact he is heavily in debt. One would hardly expect it to be otherwise in international affairs, especially in our age when the experts themselves are dominated by an ideology taken as scientific truth ever since Keynes, the ideology, that is, of a more or less veiled inflationism or, at the very least, of open anti-anti-inflationism fighting tooth and nail against admitting that the true cause of balance-of-payments difficulties lies in the financial extravagances of modern mass democracy.

In effect, the doors are wide open to an abuse of this postulate of “international liquidity.” Even now it is misused to an alarming extent, and we have reached the point where anyone who talks of “liquidity” as a rule means something very different, to wit, a sort of immunity from the consequences of an economic, social, and fiscal policy that undermines the balance-of-payments equilibrium as well as confidence in the country’s currency and international credit-worthiness. This abuse of a word that, correctly understood, refers to a legitimate and very serious problem, is, to repeat, even now most alarming. But this is nothing against what we would have to expect if, as the Triffin Plan proposes, an international super-bank were to be set up, so constructed that the book assets it administers —and creates!—would replace gold as the “definitive money” of the world economy, and the decision regarding the allocation of the “liquidity” would be left to that bank’s managing directors. The countries that accept monetary discipline and that need no such allocations but are called upon to finance them will assuredly be those whose central bank governors would regard it as irresponsible to join an institution that offers them “international” book assets in place of gold and gold-guaranteed national currency reserves and thus becomes a mousetrap for their good money. This suggests that such a “politicalization” and “institutionalization” of the international monetary system, as intended by the Triffin Plan, would not only fail to guarantee any such system but would, just like the Keynes Plan of the now remote past, most probably founder on an insufficient willingness on the part of national governments and central banks to castrate themselves by their own hand.

But the same danger signals retain their validity even within the narrower setting of a Triffin Plan restricted to Europe, as has been talked of recently. Even supposing, however, that the Triffin Plan is politically feasible and solves the problem of international liquidity better than has been done so far, it can still only do so to the detriment of another problem, which is the real problem of the international monetary system. The Triffin Bank would be free from the “golden brake” (Schumpeter) and endowed with the money-creating possibilities of a bank that itself, within certain limits, has no liquidity problem of its own, but would have to serve the liquidity demands of its more unsound clients and would certainly be under the influence of the prevailing anti-anti-inflationist ideology; it would be hard indeed for such a bank to resist the temptation of inflationary policy or at least of lending its support to existing inflationary tendencies. The reproach that Jacques Rueff, nowadays the butt of so many attacks, rightly makes to the present monetary arrangements in the world, namely, that they inflate international credit in the same way as a genuine gold exchange standard, would apply even more forcefully to the Triffin Plan. It does, in fact, amount to a sort of super-gold exchange standard on the international scale, with its only difference from a national one being that there would be not even any possibility of the inflationary kite-flying’s correcting itself by the sort of run on the currency that Rueff is afraid of.

If we are now to state the real and central problem of an international monetary system, we might formulate it as follows. The world suffers from the elementary incompatibility of three things, namely, convertibility of such a passable, average degree as has now been re-established, stability of exchange rates, and the freedom of each country to choose whatever degree of monetary discipline at any given moment seems to lie on the national line of least political and social resistance. Since this line happens to vary a great deal from one country to the next (by way of illustration: on the average of the years 1953-1956, the working days lost annually per 1,000 workers numbered 575 in the United States, 205 in France, 135 in Great Britain, 70 in Germany, and 9 in Switzerland), and since, furthermore, some countries are more and others less prepared to follow that line according to the greatly varying anti-inflationistic allergy of the population (it is very high in Germany, to the despair of inflation-minded experts in Anglo-Saxon countries) and to the equally varying degree of monetary cynicism in high places, convertibility at fixed rates cannot possibly be reconciled with the autonomy of national monetary policies. Where the clash can lead has been made plain by the example of the German currency.

Thus, the heart of the problem is the elementary incompatibility of the two postulates of an international monetary system, namely, free convertibility and stability of exchange rates, and the considerable differences in the degree of monetary discipline. This conflict must be removed, and that is the alpha and omega of the international monetary system to be striven for. But the conflict can be removed only by sacrificing one of the three incompatible elements.

Which is it to be? Not free convertibility, in any circumstances—that much is surely common ground, although some of the reform proposals do, on closer inspection, imply a curtailment of convertibility.

What about sacrificing the stability of exchange rates? This may in certain circumstances save the situation, or at least be regarded as the lesser evil, as the devaluation of the French franc at the end of 1958 as well as the recent revaluation of the D-mark have proved convincingly and, it is to be hoped, finally. But it has become equally clear that we cannot get by with such once-only corrections so long as we have to live with considerable differences in national monetary discipline and hence with the permanent danger of serious balance-of-payments disturbances and imported inflation. In that event, the countries with relatively strict monetary discipline would be faced with the choice either to strike sail and submit to inflation’s being foisted upon them from outside in whatever degree is deemed fit by the ideological inflation-mongers and the trade union bosses of the United States and Great Britain, or else to cut the rope that forces them into the wake of inflation elsewhere and to try their luck with the famous floating rates of exchange.

This leads us into a subject that cannot possibly be fully discussed on this occasion. But through all the controversies it should be clear that this is an experiment lacking the background of practical experience, and a hazardous experiment at that, to be considered only as a counsel of despair. We may wish that it were agreed also that the postulate of stable exchange rates, while not ranking nearly as high as that of free convertibility, nevertheless does come immediately after the latter. Without stability of exchange rates any international monetary system would be flawed at an important point, because it would lack a major condition of international economic integration. Just how important this condition is will be seen if we reflect that national economic integration (among the separate regions of one country) is unimaginable with fluctuating rates of exchange between, say, regional currencies. In view of all this, the utmost reserve is indicated in regard to this expedient, not to mention the ultimately decisive fact that in any case it is hardly feasible in practical politics.

When all else fails, of course, a determined resistance to inflation may, as a last resort, require that serious consideration be given to the solution of cutting exchange rates loose from the anchor of parity. But it would be an act of defeatism with respect to the true task, which is to create a world monetary system at last. If we do genuinely want such a system, then —and this brings us to the third point—every effort must be brought to bear on removing today’s considerable differences in monetary discipline, at least among the leading industrial nations, and on achieving a uniform international pace. Naturally, this would make sense only if that pace were set by the countries with most monetary discipline. The thriftless should be induced to fall into line with the prudent, rather than forcing the prudent into the laxity of the thriftless, as is the aim or effect of so many of the current “plans.”

These are the clear marching orders to be acknowledged by all who desire both an international monetary system and a successful defense against world inflation, and who are not prepared to achieve either an international monetary system at the cost of national monetary stability, or national monetary stability at the cost of an international monetary system. It would be unreasonable to expect this attempt at definite orientation to be combined at once with a hard proposal for giving effect to the aim so defined. Only two things may be stated.

The first of them is that if even the classical gold standard was unable to assert itself otherwise than step by step, the new international monetary system will be even more dependent on a nucleus of countries that make a start with it. This idea seems to be in the air today, witness especially an article by a man of no less authority and distinction than the former president of the German central bank, Dr. Wilhelm Vocke,1 and it does indeed make sound common sense. Its implication is that, within the area of this club of countries committed to equal maximum monetary discipline, the two postulates of the international monetary system, namely, freedom and stability in the foreign exchange market, can be met without inflationary consequences. Conversely, however, this means that the club members cannot in future guarantee stability of exchange rates in relation to other countries unable or unwilling to fulfill the membership conditions of the club. It should be a point of honor for every country to belong to this club of the prudent and trustworthy, for not to do so would be tantamount to an admission of not being credit-worthy.

The second remark is this: The authors of most of the reform proposals current today seem to think that the problems of an international monetary system can be solved without gold as the basis of the monetary system, at least internationally, and without respecting gold as “definitive money.” This is an illusion of which we must rid ourselves. What this means in practice cannot be discussed in detail here, but there is just one point that should not be passed over in silence. It is that this high esteem for gold rests upon the rather unfashionable conviction that the basic idea of the gold standard has been the victim of a character assassination during the last twenty or thirty years. We have witnessed the emergence of a sort of fable convenue in this respect, a myth of very special kind, a tissue of unfounded and unproven assertions and accusations that have long wanted scientific revision. Another point should be made clear beyond doubt. Any plan that does assign to gold the function of ’/definitive money” in an international monetary system simply cannot take for granted that today’s completely archaic gold price will adjust itself of its own accord to the international system of values. But this means also that any deliberate adjustment of the gold price as a cardinal value of the world economy is justifiable only to the extent that this condition of a new monetary system is strictly safeguarded against inflationary abuse.

When all is said and done, the conditions of an international monetary system firmly based on gold are identical with those of victory over today’s world inflation. Anyone inclined to smile at even a so modestly conceived return to gold as a foolish Utopia should, therefore, in all honesty admit that world inflation cannot be defeated. If anything is foolish in all this, it is surely that smile.

All the experts, or would-be experts, in currency matters can be divided into two main groups, those to whom gold is a thorn in their flesh and who therefore might be named chrysophobes, and those who have a predilection for gold and who shall be baptized chrysophiles. The intellectual genealogy of modern chrysophobia as a new trend remains to be written. It can be traced from John Law, where all the arguments can already be found, to Keynes and his adepts; and the agreement of Hitler and Khrushchev on this and on other matters is a fact that does no credit to chrysophobia but, instead, to gold, which is hated by all Jacobins and collectivists. Chrysophobia does, in effect, have a penetrating odor of ideology and of a sort of world do-goodery, and few things are as characteristic of our age as the complete ascendancy of chrysophobia over chrysophily. It is a form of indignation about something allegedly antiquated, primitive, anti-progressive, reactionary, profit-minded, a form of social rationalism extolling something as progressive, enlightened, and superior, a sort of doctrinairism in the sense of an attitude’s riding roughshod over the facts.

This is where chrysophily is quite different. To be sure, it is also founded on certain value judgments, of a liberal, anti-collectivist, anti-étatist, and anti-nationalist kind, but in addition it rests on one of the most durable and uncontestable facts, namely, on the anthropological circumstance that everywhere and all times, and notwithstanding all chrysophobic ideologies, people have regarded and still regard gold as the ultimate store of value, as the most liquid good, as a refuge when all else fails. Funnily enough, this applies to the chrysophobes themselves, when they don’t talk but act. When John Law, we are told by Michelet, decamped after his chrysophobic bubble burst, his bag was found at the frontier to contain large quantities of gold and precious stones; Hitler, however much he was given to ranting against gold, shamelessly caused it to be wrenched from the dentures of his victims, and Khrushchev is not deterred by his obscene cracks about gold from taking good care of it as the indispensable key to the most coveted goods of the free world.

Just why people have this attitude to gold is an interesting question in its own right. The answer to it will have to take account of many things, but, above all, of the following. The anthropological fact of auri sacra fames is an expression of the almost instinctive preference for an ultimate store of value that, determined as it is by a consensus saeculorum, is truly international and independent of governments and their folly. Chrysophiles consciously avow this preference. They see in gold the inestimable merit of anthropologically conditioned, para-governmental anchorage of the national and international monetary and payments system.

The earth is far from being the best of all possible worlds. And yet there are things in it of wonderful wisdom; for instance, the circumstance that the economic order associated with the ideal of freedom is infinitely more productive than that resting on unfreedom. But, strangely, men are inclined to disregard just such lucky accidents of creation, especially if they happen to be intellectuals, clever but unwise. This applies also to gold. It is a miraculous circumstance that there should exist a rare product of nature on which civilized mankind has been able to agree as an ultimate store of value. The chrysophile considers it foolish to disregard this unusual lucky accident, and he feels that if gold did not exist, it would have to be invented, were it not that it is the essence of gold to be one of those natural things that, like language, cannot be invented. But he is convinced that the wisdom of gold will eventually always triumph over the folly of its detractors.2

* 1961.

1 Neue Zürcher Zeitung, July 19, 1961.

2 Cf. Charles Rist, The Triumph of Gold (New York, 1961), an English-language edition by Philip Cortney of collected essays by the great French economist who died in 1955.