From Bretton Woods to World Inflation

July 24, 1944

The final text of the articles of agreement of the proposed International Monetary Fund differs very little, except in the elaboration of details, from the proposal submitted before the conference met. In view of the instructions of the President to the American delegation, this is not surprising. In a letter to Secretary Morgenthau, the United States delegation chairman, on June 9, Mr. Roosevelt wrote: “You and the other delegates will be expected to adhere to the joint statement of principles of an international monetary fund announced April 21, 1944. You ...are authorized ...to agree to modifications...provided that such modifications do not fundamentally alter the principles set forth in the joint statement.” These instructions were unfortunate. They prevented the very discussion of-basic principles that was most essential, and made the conference, in effect, a rubber stamp which did little more than endorse the previous work of the technicians.

The result is that the final agreement meets none of the fundamental criticisms that applied to the tentative agreement. A vast machinery is provided which is confused in its objectives. One of the six declared purposes of the Fund is “to promote exchange stability.” But again and again provisions are included to promote instability. The Fund is not allowed to raise any objection if a nation devalues its currency by 10 per cent. It must give an answer within three days if the nation wants to devalue a further 10 per cent. It must concur in practically any proposed devaluation if the change is necessary “to correct a fundamental disequilibrium.” It is not allowed to object to a proposed devaluation “because of the domestic, social or political policies of the member proposing” the devaluation. In other words, the Fund cannot criticize internal policies even if they are the direct cause of the devaluation. And the final agreement retains the provisions to authorize a worldwide inflation.

Another declared purpose of the Fund is “the elimination of foreign exchange restrictions.” But the detailed proposal itself not only permits but encourages and necessitates foreign exchange restrictions. “The post-war transitional period” is made an exception, during which nations may introduce or continue whatever foreign exchange restrictions they want. The “post-war transitional period” is not precisely defined, but is apparently to last at least three to five years. Even after this any nation may “regulate international capital movements,” and in some cases will be even requested to do so. If a currency becomes “scarce,” other nations may ration that currency and “impose limitations on the freedom of exchange operations in the scarce currency.” All this implies a return to the foreign exchange restrictions developed in the Thirties. It implies a world in which individuals will act under more, not less, government coercion and will have less freedom to buy and sell and make payments where they like.

The proposed agreement sets up a huge machinery and ignores all the basic principles which must be adopted if such machinery could hope to be successful. The American money poured into supporting weak foreign currencies will be worse than wasted, unless the loans are made conditional upon internal reforms in the borrowing nations. Such nations must eschew resort to financing by the printing press. They must prepare to balance their budgets and make their currency convertible into gold or into a gold-convertible currency at par. The United States must take the lead in these reforms. Only on these conditions will genuine currency stability, freedom of world trade, and continuous international cooperation be possible.

What was contemplated in the Bretton Woods agreements and in the 1944 proposed international commodity agreements was not freedom for individuals in different countries to trade with one another on their own terms, but a world in which international prices and trade would be State-dominated. This would only lead to failures, as in the past, and to dangerous international antagonisms.