From Bretton Woods to World Inflation

July 1, 1944

Today the representatives of more than forty nations will gather at Bretton Woods to open a monetary conference. In several respects the conference will get off to an unfortunate start. Important as the problem of stable exchanges and world monetary soundness is, it would be impossible to imagine a more difficult time for individual nations to decide at what level they can fix and stabilize their national currency unit. How could the representatives of France, of Holland, of Greece, of China, make any but the wildest guess at this moment of the point at which they could hope to stabilize? This problem exists on a world-wide scale to a greater extent than ever before in history.

It is perhaps an even more serious obstacle to success that the main proposal for stabilization the conference is scheduled to consider quite misconceives the nature of the problem to be solved and therefore attempts to solve it from the wrong end. It proposes that each nation shall adopt a par value for its currency that the other nations shall accept; that the nations shall put gold or their own paper currencies into a common pool, and that the resources of that pool shall be used to try to keep each currency at par by a commitment to buy the weak currencies with the strong currencies. The fund is not to exercise any real control, however, over the internal policies of the countries with the weak currencies.

It is obvious that such a plan could maintain even the outward appearance of success only for a short time. It is possible, of course, to keep a valueless currency at any arbitrarily chosen level by a commitment to pay that price for it, just as it is possible to keep a worthless stock at $100 a share by buying at that price all of the stock that is offered for sale. But when the allotted resources of the buyer run out, the currency or the stock will immediately drop to its natural level, and the buyer will find himself holding just that much worthless paper. The plan becomes particularly unrealistic when each nation can turn out unlimited amounts of its own currency on its own printing presses—with the incentive, which it does not ordinarily have, of a buyer at a fixed price. It seems probable that the plan could only lead to a huge waste of funds and to a temporary world inflation with a subsequent collapse.

On the positive side, what could and should be done at the Bretton Woods conference? Much would be gained by an agreement on certain fundamental principles. The first essential is a determination to make currencies sound within each country. The United States is in a position to take the leadership. The most important contribution that this country could make to world currency stability would be to declare unequivocally its determination to stabilize its own currency. It could do this by announcing its determination to balance its budget at the earliest practicable moment after the war, and by announcing that the dollar would no longer be on a “twenty-four” hour basis, and subject to every rumor, but firmly anchored to a fixed quantity of gold. This nation would also have to make clear that it was willing to take the initiative in lowering its own tariff barriers, whether or not other nations were willing to follow, and that we for our part would refrain from import quotas and exchange restrictions. Even if we adopted such a program only partially it would be of immense help. We could then urge other countries to follow our example, not for our benefit, but for their own.

It is true that the present fashionable fiscal theories stand in the way of such primary reforms. But the United States will hold one great inducement for securing them. Most other countries will need help in returning to a sound currency and sound internal policies. We are in a position to supply it. We can offer moderate gold loans in return for such reforms. The reforms would not only be in the direct interest of the nations making them, but not unless they were made would our loans have a reasonable prospect of repayment.

So far as possible, the loans should be made by American private Investors, who, through their representatives, would be in a much better position diplomatically to insist on sound policies within the borrowing nation than our own Government would be. But for a limited period of years, and solely for stabilization loans, there may be an advantage in having Government participation, either on some such basis as that of FHA mortgages or by the Government taking 5 or 10 per cent of individual loans. Government participation of this sort might increase both the volume of such loans and the promptness with which they were placed, at the same time as the dominant private interest would take the loans out of the dangerous political field and assure that they were made on business principles and with adequate guarantees.

But any machinery that is set up will be of secondary importance for world recovery compared with ideological reforms. Each nation should abandon the fallacious idea that it is to its own advantage to inflate or devaluate, or that it gains when it erects huge tariff barriers or subsidizes exports or blocks its currency, or when it forbids its own citizens to export gold, capital, or credit. Each nation should abandon the fallacious idea, in short, that it gains when it makes economic war on its neighbor.

Nearly every nation represented at Bretton Woods sought to increase its “quota” in the Fund, because this meant not what each one would have to put into the Fund but what it hoped to draw out. On the basis of this quota it could “buy” currencies of real value—meaning, in the main, American dollars—to twice the amount of its quota. This could encourage inflation in such countries and prove very expensive—and wasteful—for the United States.