From Bretton Woods to World Inflation

February 10, 1945

An Associated Press report attributes to Secretary Morgenthau an interesting comment on the American Bankers Association report on the Bretton Woods agreements. “It has been proved, as far as I am concerned, that people in the international banking business cannot run successfully foreign-exchange markets. It is up to the Governments to do it. We propose to do this if and when the legislative bodies approve Bretton Woods.”

Such a comment is not likely to be helpful to the Bretton Woods agreements. For those agreements have hitherto been represented as part of an effort to free the post-war foreign-exchange market from arbitrary governmental controls. One of the stated objectives of the Fund in its official text, indeed, is “the elimination of foreign-exchange restrictions.” But if Secretary Morgenthau is correctly quoted, he now tells us not only that Governments are going to restrict the foreign-exchange markets, but under the agreements are going to run them entirely. This means that no one would be allowed to make a single import or export, or to use his dollars to make a trip abroad, without the Government’s consent. Such an argument is hardly likely to appeal to believers in a freer world trade.

Supply creates demand. Real purchasing power grows out of production. In the aggregate, in fact, supply and demand are not merely equal but identical, since every commodity may be looked upon either as supply of its own kind or as demand for other things. The classical economists recognized this basic truth. But John Maynard Keynes (the leading author of the Bretton Woods agreements) ignored the necessary qualifications to the classical doctrine. He was confused by the existence of triangular exchange through the medium of money, and attributed every slackening of business to a shortage of “purchasing power” as measured in money. This logically led to recommendations of continuous additions to the supply of money—in other words, inflation. This Keynesian ideology permeated the Bretton Woods agreements.