From Bretton Woods to World Inflation

July 9, 1934

The presence at Basle of Governor Harrison of the New York Federal Reserve Bank is a favorable sign, particularly when we learn that he has been conferring there with Governor Norman of the Bank of England. Whether the two have been discussing the stabilization of the pound and the dollar, or the eventual return of both to a fixed gold standard, will probably remain for the present in the realm of conjecture. The knowledge that that problem was at last being dealt with, however, would be extremely heartening. We can hardly expect a vigorous and continued world recovery so long as the two principal world currencies remain subject to fluctuation and uncertainty.

The view is sometimes expressed that the United States has already returned to the gold standard. It is a very equivocal gold currency, however, that can be changed in value overnight by nearly 15 per cent at the decision of one man. Our Government could return to a genuine fixed gold standard acting alone. But announcement of such a plan would not have half the immediate buoyant effect on world confidence that a joint announcement by the two great English speaking countries would have. The latter would not only restore stability to the two major units of value, but would symbolize a return to international collaboration in a world that has been drifting steadily toward a more and more intense nationalism.

One cause for hope of an early agreement is that many of the illusions concerning the advantage of drifting currencies and competitive depreciation have been dissolving under the test of experience. Great increases in export trade have not followed depreciation; the usual result of anchorless currencies has been a shrinkage of both export and import trade. Again, the fallacy is beginning to be apparent of the idea that a currency allowed to drift would finally “seek its own natural level.” It is becoming clear that the “natural” level of a currency is precisely what governmental policies in the long run tend to make it. There is no more a “natural value” for an irredeemable currency than there is for a promissory note of a person of uncertain intentions to pay an undisclosed sum at an unspecified date. Finally, it has been learned that competitive depreciation, unlike competitive armaments, is a game that no Government is too poor or too weak to play, and that it can lead to nothing but general demoralization.

Instead of putting its emphasis on the need for each country to keep its own currency strong by maintaining convertibility, by keeping its budget in balance, and by refraining from inflation, trade barriers, and exchange restrictions, the Bretton Woods agreement proposed that the strong currencies should subsidize the weak. It lost sight of the fact that the chief duty of the United States was to maintain the integrity of the dollar.