From Bretton Woods to World Inflation

September 19, 1944

Winthrop W. Aldrich, Chairman of the Board of the Chase National Bank, suggests as a substitute for the plans advanced at the Bretton Woods conference the negotiation of international agreements for the removal of trade barriers and the establishment of a stable dollar-sterling exchange rate. Whatever may be the final verdict upon the merits of his proposal, his analysis of the proposed International Fund and Bank is thoughtful and impressive, and his own positive proposals make it obvious that his viewpoint is far from that of an economic nationalist.

Mr. Aldrich points out that under the instructions from the President both the American delegation at Bretton Woods and the delegations of other countries were committed to a particular monetary plan in advance and were not free to work anew on the problem or to consider an alternative approach. The powers of the Fund “seem to be obscure and uncertain.” Its objectives “lack the focus essential to its success.” The United States, by far the largest contributor, will be called upon to supply “about 70 per cent” of the real lendable assets of the Fund. “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.” Mr. Aldrich cites the many liberal provisions for alterations in exchange rates, and fears that under them “exchange depreciation would undoubtedly become an accepted and normal procedure in international financial affairs.” Proposals for exchange depreciation, indeed, “would be inevitable, since the plan attacks the symptoms rather than the basic causes of exchange instability.” The effect of the Fund provisions, he fears also, would be to increase rather than reduce exchange controls. After an examination of the proposed international Bank, Mr. Aldrich concludes that there is no sound function it could undertake which could not be done better by our own existing Export-Import Bank.

Mr. Aldrich then comes to his alternative proposal. “The all-important economic problem of the post-war world is the removal of trade barriers.” He proposes that the United States, the United Kingdom and other members of the British Commonwealth enter into immediate conversations on such problems as tariff barriers, imperial preference, export subsidies, bulk-purchasing and regional currency arrangements. If the proposed conference proved successful in achieving a joint agreement to shun totalitarian tactics in international trade and to adopt economic liberalism, the United States should offer to 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.”

Once the dollar-pound rate is stabilized, attention 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.” Implicit in all this, Mr. Aldrich concludes, is our responsibility to make our own currency in the postwar period one in which other nations can have confidence. This, as he shows, will not be easy, for it will involve the repeal of some unsound monetary legislation still on the books, and it will involve ultimately a balanced Federal budget.

There would clearly be some embarrassment in setting aside now the plans agreed to at Bretton Woods, even if they have the defects and dangers that Mr. Aldrich believes they have. It is by no means certain, either, that an Anglo-American agreement of the type he recommends could be brought about. But he has put forward a carefully reasoned argument and a constructive proposal that deserve serious open-minded study.

Prof. John H. Williams of Harvard and vice-president of the Federal Reserve Bank of New York, in an article in Foreign Affairs, suggested that Congress postpone any decision on the proposed Fund, but adopt the proposed Bank with modifications. He found it to be an “unstated assumption of the Fund”, among others, that there would be “a general retention of the machinery of exchange control not only for the transition period but permanently.”