From Bretton Woods to World Inflation

July 18, 1944

Genuine international economic cooperation after the war will be possible only if there is a profound change from the ideology of the Thirties. Nations must learn that their own economic salvation is not to be attained by making economic war upon their neighbors. They must learn that prohibitive tariffs, import quotas, competitive depreciation, exchange controls, blocked currencies, restrictions on capital export, are the road to economic disaster. The return of international peace and prosperity will be possible only if these devices are abandoned and if the neo-mercantilist fallacies that give rise to them are abandoned also. To achieve this international cooperation will require not only generosity and goodwill on our par but, above all, clarity of thought.

The Administration has shown the good-will and the generosity. These have reflected themselves in such an indispensable institution as UNRRA [United Nations Relief and Rehabilitation Administration]. Unfortunately, in the proposals that the Administration has sponsored at Bretton Woods it has failed to show clarity of thought. The result is a plan confused in its objectives and hazardous in its possibilities.

The delegates at Bretton Woods—above all, the American delegates—seem to be obsessed by the idea of machinery. They act as if international economic cooperation could be achieved only by setting up some elaborate organization, with funds and quotas and votes and rules and whereases, and as if the mere existence of such machinery in itself constituted a solution of the problem. In their determined efforts to secure agreement on the superficial problems of machinery they have failed to secure or even to seek agreement on the really baste problem of principles.

The key to the kind of organization they have been setting up can be found in the struggle of nearly every nation to increase its “quota” in the fund. For this “quota”, apart from that of the United States, represents fundamentally not what each nation puts into the fund but what it hopes to take out of it. The real assets of the fund will consist of its gold and of whatever currencies are reliably convertible into gold or even into wanted goods. But each country will make a maximum contribution in gold of only 25 per cent of its quota, and in many cases the percentage contribution in gold will be far below that. For the rest it can throw in its own paper money, valued at an arbitrary figure, whether or not it is convertible into gold or represents anything but the product of the printing press. On the basis of this quota it can “buy” currencies of real value—meaning in the main American dollars—to twice the amount of its quota.

In simpler terms, by putting in a very small quantity in gold, a country can borrow many times that amount in dollars or other valuable currencies. In still simpler terms, this means that America agrees in advance to lend each of more than forty other countries up to a certain fixed amount of dollars, whether or not there is any reasonable prospect of repayment, and regardless of the internal economic policies of each country or what it does with the money. This not only means that we can lose many dollars in bad loans, but, what is more important, that as long as credit is available to nations under these easy conditions they will postpone unpleasant but essential economic reforms.

What is needed above all is an agreement on sound principles. Through UNRRA we should give to the former occupied countries promptly and generously whatever is needed to relieve hunger and distress. Humanitarian gifts, however, should not be confused with business loans. No loan should be automatic in amount or made without conditions. It should be granted only where there is teal prospect of repayment, and only on consideration of the adoption of sound internal economic policies in each borrowing country. America, as the strongest financial country in the world, could not in consistency impose conditions and principles that it was unwilling to adopt first of all for itself. The greatest contribution that America can make to international cooperation is to take the lead in removing excessive barriers against imports, in announcing a determination to halt deficit financing and to balance the budget as soon as possible after the war, and in revealing a determination to stabilize the dollar in terms of a fixed quantity of gold. That policy, in turn, would supply not only an example but an anchor for other currencies.

Because Lord Keynes thought it “worse than a mistake to attempt the invidious task of discriminating between members and assessing their credit worthiness,” bad borrowers with bad records and bad internal policies were to get loans from the Fund and the Bank on the same terms as good borrowers with the best records and sound internal policies—thus assuring a further loss and waste of scarce world capital.