From Bretton Woods to World Inflation

June 26, 1944

One of the ostensible objects of the proposed International Stabilization Fund is “to promote exchange stability.” The more the “statement of principles” for the fund is examined, however, the more difficult it becomes to find exchange stability in it. It provides, indeed, that when any nation enters the fund a par value for its currency shall be fixed or stated; but this can apparently be changed at any time. A member country may propose a change in the par value of its currency, for example, if it considers such a change “appropriate to the correction of a fundamental disequilibrium.” A “fundamental disequilibrium” is not defined in the statement. No country that wishes to devaluate should find great difficulty in arguing that it wishes to do so to correct a “fundamental disequilibrium.”

The statement of principles continues:

The fund shall approve a requested change in the par value of a member’s currency if it is essential to the correction of a fundamental disequilibrium. In particular the fund shall not reject a requested change, necessary to restore equilibrium, because of the domestic, social or political policies of the country applying for a change.

In other words, the nations which have been supporting that country’s currency cannot reject a devaluation merely because the “fundamental disequilibrium” complained of has been the direct result of unsound internal policies.

The statement of principles provides that a member country may reduce the established parity of its currency by 10 per cent. “In the case of application for a further change, not covered by the above and not exceeding 10 per cent, the fund shall give its decision within two days of receiving the application, if the applicant so requests.” This is a little ambiguous but seems to imply that a nation can devalue a further 10 per cent with the consent of the fund. Suppose the nation wishes to devaluate still further? This seems to be provided for under Section VIII, Paragraph 1: “A member country may withdraw from the fund by giving notice in writing.” The length of the notice is not specified: apparently the member country’s withdrawal could take place immediately after the notice was received.

In other words, while under the plan the net creditor nations pledge themselves through their contributions to the fund to buy each net debtor member nation’s currency to keep it at parity, they have no assurance that the value of these currency holdings will not suddenly shrink through a sudden act of devaluation on the part of the nations whose currencies they hold.

The guiding idea of the conference, even at its opening, was that the value of the weak currencies should be maintained by the countries with strong currencies agreeing to buy them at a fixed rate, regardless of their market value. This could only weaken the strong currencies. The one real cure was disregarded: to encourage each country to refrain from inflation and to maintain the integrity of its own monetary unit.