From Bretton Woods to World Inflation

October 27, 1944

A dispatch from London to this newspaper declares that the question of the merits or demerits of the Bretton Woods world currency stabilization agreement has been pushed aside as academic in Great Britain by the more immediate and acute currency problems that threaten the liberated countries of Europe. This calls attention once more to the fact that, contrary to common belief, the proposed International Monetary Fund is planned as “a permanent institution” and is not designed to solve the currency problems of the transitional period from war to peace. It is precisely these problems, however, that are the more difficult to solve.

The boldest attempt to bring order out of chaos in the domestic currency situation has been made in Belgium. The other liberated countries of Europe are watching this experiment anxiously. Many of the details of the Belgian plan have not been made clear in the cables; but the plan in its broader outlines does not appear to be well-conceived. It aims to reverse part of the inflationary process by deflation, by reducing the outstanding note circulation by some 30 or 40 per cent, and by freezing people’s present bank balances so that they can spend only a small part of them.

But once inflation has done its harm, it is impossible to try to undo this harm by the reverse policy of deflation. The deflation merely brings a new series of injustices and difficulties. Its most dangerous aspect is that by trying to force down prices and wages from the levels they have reached, it may result in economic stagnation, in unemployment, in a throttling of production. The process is politically unpopular; so much so that our London dispatch declares that the Belgian deflationary program, which is less than two weeks old, already threatens the overthrow of her present Government.

The safest policy for a Government to follow, once inflation has been allowed to occur, is to try merely to prevent the process from going further, by fixing a new value for the currency calculated to stabilize prices and wages at their new level. This means refusal to put out further issues of paper money, but it rarely involves recalling (except in exchange for new currency) part of the paper money already outstanding.

The currency problems of liberated Europe are complicated by many other factors. One of these is the system of price fixing. When prices of necessities are fixed below the levels to which the free play of supply and demand would bring them, one of two results must follow. If profit margins for producing necessities are non-existent or below the levels for producing other goods, then the commodities whose prices are fixed will either not be produced and sold, or the Government will have to subsidize the producers to make sure that they are produced and sold. In the first case shortages will be intensified in precisely the goods of which it is necessary to have fullest production. In the second case the burden on the Treasury will be greater, the budget will be thrown further out of balance by the subsidies, and more note issues, that is to say, more inflation, will be used to pay them.

Belgium today seems to be facing both consequences. The Belgian Government is sending convoys of trucks around the country to try to gather in the farm products that have not come to market, It has raised the prices paid to farmers for cattle and milk while leaving fixed retail milk and meat prices unchanged—which means that it must supply the difference by subsidies.

On humanitarian grounds and on grounds of friendliness, Americans are eager to see the newly liberated countries of Europe solve their difficult economic problems as well and as quickly as possible. They know, even on selfish grounds, that a prosperous post-war America requires a prosperous post-war Europe. But they have an even more immediate and direct interest in the policies followed by the newly liberated countries of Europe at this time. The problem of transporting and distributing American food to Europe through the Army, the Red Cross and UNRRA will be great in any case. We do not want to see it intensified by mistaken governmental policies in Europe that would reduce what the people of these countries would otherwise be able to produce for themselves.

The American Bankers Association published a carefully reasoned and conciliatory report recommending that Congress should not approve the proposed International Monetary Fund but only, with modifications, the proposed International Bank. It pointed out, among other objections, that the Fund agreement granted credit automatically as a matter of right, and did not even stipulate that its loans should be sound loans.