From Bretton Woods to World Inflation

March 15, 1945

This newspaper received a letter from Robert Boothby, which it published on March 4, and a second letter, which it published on March 14, referring to the Bretton Woods agreements. Mr. Boothby is a Member of Parliament and chairman of the Monetary Policy Committee in London.

In both letters Mr. Boothby pointed to what he called certain “major obscurities” in the Bretton Woods Monetary Fund agreement, and he pointed out that regarding several of them precisely the opposite interpretations had been made in Great Britain from those generally made here:

You have been led to believe that the Bretton Woods proposals take us all back along the road to a gold standard, currency stability, nondiscrimination and multilateral trade. We have been assured that they constitute the exact reverse of a gold standard, that exchange rates will be flexible and that reciprocal trade agreements involving discrimination will be permissible.

Treasury spokesmen, discussing Mr. Boothby’s contentions before the House Banking and Currency Committee, do not appear to have dealt with them very satisfactorily. They questioned Mr. Boothby’s motives and his purpose in being in this country at this time. Such personal considerations do not meet the real issue, which is, Do the obscurities and ambiguities which Mr. Boothby alleges to be in the Bretton Woods agreement in fact exist?

There can be not the slightest doubt that they do. Widely different interpretations have been made of the Fund agreement here and in London. It was Lord Keynes, leader of the British delegation at Bretton Woods, who declared before the House of Lords: “If I have any authority to pronounce on what is and what is not the essence and meaning of a gold standard, I should say that this plan is the exact opposite of it.” It is Lord Keynes, also, who in a letter to The Times of London contended that the Bretton Woods plans would still permit Britain to make purely regional trade and currency arrangements, a view that has been disputed in the United States. There has developed in addition a vital difference of opinion concerning whether the credit granted by the Fund is automatic, regardless of unsound currency or other economic policies in the borrowing countries, or whether the Fund has a right to withhold credit because of such policies.

Wholly apart from Mr. Boothby’s personal motives, in short, he is correct when he writes that “Nothing could be more deleterious to the future of Anglo-American relations than that the two countries should sign an agreement, each thinking that it means something quite different.” It simply does not make sense for the United States, Great Britain or any other country to commit itself to the Bretton Woods Fund agreement without knowing precisely what it has committed itself to.

Yet a strange situation has arisen in recent months. It is the bankers and others who are critical of the Bretton Woods Fund Agreement—in part, precisely because they fear that it really is “the exact opposite” of the gold standard—who are today being denounced in some quarters as “isolationists” and enemies of international cooperation. It is some of the very people who are insisting on the Bretton Woods Fund Agreement, on the other hand, many of them precisely because they believe that it will permit the continuance of managed inconvertible paper money systems, who try to arrogate to themselves alone the title of “internationalists.”

This strange paradox is brought out in a review in the current Political Science Quarterly of Prof. Edwin W. Kemmerer’s book, “Gold and the Gold Standard.” As Professor Kemmerer points out, the most international standard is gold, while the most national is paper or some other non-gold currency.

A nation that formerly adhered to the international gold standard, it is true, did not sign any formal document of monetary cooperation with other nations, but the cooperation was none the less real and thoroughgoing, A nation that wished to stay on the gold standard had to keep its own currency stable In terms of gold. To do this it had to make its currency convertible on demand into a definite and fixed quantity of gold. To make sure that its promise of convertibility would be kept, it had to keep its budget in reasonable balance and see to it that an inflationary expansion of bank credit did not take place within its borders. It had to allow freedom of gold export. To make sure that this did not drain it of gold, it had to maintain a two-sided trade balance. It could not take its economy so far out of line with the world economy as to cut off its exports and take in too great an excess of imports.

There are several ways in which the problem might be dealt with. Congress might accept the Fund subject to an explicit set of understandings or interpretations on essential points at present left in obscurity. A much better course in every respect, however, would be for the Administration to withdraw the Fund proposal at this time, to ask Congress to adopt now only the much less controversial Bank proposal, and then to attempt to reach an agreement with the British on the important points at present subject to such divergent interpretations. An agreement so arrived at could be submitted to other nations for comments or suggestions. This would be a far wiser course than the Administration will pursue if it insists that Congress adopt the present Fund agreement blindly, without this essential clarification.

The international gold standard, when it prevailed, represented the closest form of international economic and monetary cooperation that the modern world has ever achieved. Through it the value of each nation’s currency was tied in with all the rest. Yet at this point, incredibly, the advocates of continued nationally-managed inconvertible paper money systems called themselves the only true believers in “international cooperation.”