From Bretton Woods to World Inflation

June 24, 1944

In the statement of principles for the proposed International Stabilization Fund is this short paragraph:

An agreed uniform change may be made in the gold value of member currencies provided every member country having 10 per cent or more of the aggregate quotas approves.

This is a provision which would permit world inflation. Experience has shown that it is extremely unlikely that any Government will wish to raise the unit gold value of its currency, thereby bringing about an internal drop in prices or wages. The political pressures from time immemorial, and particularly in the last three decades, have been in the direction of devaluation and inflation. There are few countries in which the most vociferous pressure groups are not in favor, at almost any time, of devaluation or inflation that would raise farm prices or wage rates, or remove unemployment caused by wage rates too high in relation to the existing price level, or to relieve debtors, particularly the Government itself, which will be urged to write down the burden of its internal debt by the device of inflation.

A provision for uniform inflation in all major countries would increase the temptation to inflate in each country by removing some immediate penalties. When the currency of a single country begins to sag because of inflationary policies, two embarrassing results follow. One is the immediate loss of gold, unless the Government prohibits its export (which makes the currency sag more); the other is the humiliation of seeing the country’s currency quoted at a discount in other nations. A uniform inflation in the world’s most important countries would avoid both of these embarrassments.

But the real evils of inflation would remain. Persons with fixed salaries or wages would see their purchasing power shrink. Pensioners would see the purchasing power of their pensions shrink. Holders of Government bonds, often bought for purely patriotic reasons, would see the purchasing power of their capital and interest shrink. Capital in the form of bonds or mortgages would be much harder to borrow; and, therefore, many buildings would not be erected and many enterprises would not be started, because of the prospect of this inflation.

It would be difficult to think of a more serious threat to world stability and full production than the continual prospect of a uniform world inflation to which the politicians of every country would be so easily tempted.

The agreement provided that any country could reduce the par value of its currency whenever this was necessary to correct a “fundamental disequilibrium’’, and that the proposed International Monetary Fund should not reject such a proposal “Fundamental disequilibrium” was not defined. No limit was put on the number of these reductions of parity provided they were individually 10 per cent or less. After having had its currency accepted at par by other members, any member country could withdraw from the Fund at any time, provided it gave notice in writing. No time period was specified for how long in advance such notice was required.