From Bretton Woods to World Inflation

October 1, 1944

In the current issue of Foreign Affairs, John H. Williams, Professor of Economics at Harvard and vice president of the Federal Reserve Bank of New York, who was a critic of the proposed International Monetary Fund in its formative stages, returns to a criticism of that proposal in the form adopted at Bretton Woods. He recommends that Congress postpone any decision on the Fund at present, but makes the interesting compromise proposal that the proposed International Bank should be adopted and its functions expanded to achieve some of the ends that the Fund was intended to achieve.

Mr. Williams begins by pointing out that Congress faces a difficult dilemma. The monetary plans framed at Bretton Woods will present one of a series of major decisions about post-war international arrangements. Our action on them will be taken as an omen of things to come. If the plans are defective, we must find better ones.

“But it will not seem constructive to insist in 1945 upon some wholly new approach and to start the whole process of international negotiation over again. The realistic and helpful approach, now, whatever one’s earlier preference may have been, is to see whether out of these plans, a solution can be found.”

Mr. Williams suggests that it would be wise to separate the proposed Fund from the proposed Bank, to adopt the Bank with modifications and to withhold for the present a decision on the Fund. He points out that the Fund is intended, in any case, primarily as a long-run agency of monetary regulation and is unsuited to handle the transitional problems that will chiefly exist in the next few years. It would supply funds “indiscriminately to all the United Nations and would make them available on a time schedule and as a matter of automatic right.” He finds it to be “an unstated assumption” of the Fund that there will be “a general retention of the machinery of exchange control not only for the transition period but permanently.” This would mean a general system of foreign exchange “reporting and policing.” The provisions for declaring a currency scarce and for rationing its supply would subject the United States, he holds, as the leading creditor nation, to exchange and trade discrimination. But there are no provisions for applying corrective measures to the wrong policies of debtor nations.

On the other hand, in looking for a compromise solution, Mr. Williams has become “increasingly interested since Bretton Woods in what might be accomplished through the Bank.” This has led him to “wish to explore the possibilities of extending the Bank’s functions to include some part of what is desired from the Fund.” For the transition period, in particular, he thinks it could be the better instrument. “It would not, like the Fund, distribute foreign exchange resources indiscriminately to the many countries that do not need them as well as to those that do. It would operate selectively, and with discrimination, both as to place and to time.” Mr. Williams suggests that in addition to its present intended functions there might be added to the Bank an exchange stabilization loan department. “It would require a much smaller sum and at the same time probably be much more flexible and effective than the proposed Monetary Fund.”

Meanwhile, he thinks, the central post-war international economic problem will be the solution of England’s special difficulties created by the $12,000,000,000 accumulation of sterling war balances in London. When this has been disposed of, the solution of monetary stabilization, he is convinced, must be found through the “key currencies” principle, and must be built upon the stabilization of the two key currencies, the dollar and the pound, with respect to each other.

While the Bretton Woods talks were going on, the countries of Europe were trying to solve their immediate currency problems individually. But Belgium, for example, was planning the unnecessary and dangerous course of deflation by reducing its outstanding note circulation by 30 or 40 per cent and freezing people’s bank balances. Deflation merely brings injustices and other evils of its own, without undoing the harm of past inflation.