From Bretton Woods to World Inflation

March 17. 1945

The monetary plan embodied in the Bretton Woods agreements, Lord Keynes assured the House of Lords, is “the exact opposite” of the gold standard. Now the international gold standard, when it was in its fullest operation in the early part of the present century, 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 that of all the rest. Through it, likewise, each nation’s economy was tied in with that of the rest of the world.

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.

It is precisely because the gold standard did have these international implications that nationalists, and the advocates of domestic managed economies and of autarchy, were so opposed to it. It is no accident that the literature of nazism is so full of denunciations of the gold standard and of “international bankers.” But now, in a topsy-turvy argument, it is the bankers who are being denounced, not as internationalists but as “isolationists,” because they prefer a restoration of the international gold standard to a system under which each nation individually would be free to follow whatever unsound policies it wished, while the nations collectively would have to bail it out of the difficulties into which it fell as a consequence.

In an inconsistent report that read like a compromise arrived at in order to obtain agreement among all fourteen members, the Committee for Economic Development, a group of businessmen, pointed out the dangers of putting the Fund (as then planned) under pressure to make long-term loans, to do it whether or not these loans were likely to be repaid, and to do it without having the power even to lay down conditions for such loans. The CED recommended that powers to make long and short-term stabilization loans be made merely discretionary and turned over to the proposed International Bank, But the CED inconsistently recommended that the Fund be retained, even after it had thus been made unnecessary.