International Economic Disintegration

CHAPTER XX THE DISTURBANCES IN THE MONETARY-FINANCIAL MECHANISM OF WORLD ECONOMY

THE monetary element cannot be separated from other aspects of the process of international economic disintegration, with which it is bound up both as cause and as effect. It has proved impossible, therefore, to eliminate this element during the different stages of the present enquiry; and thus it has been mentioned again and again whenever it was necessary to do so. It is quite clear that the world economy of to-day and the economic policy of the various countries would be entirely different if we still had an international monetary system like the gold standard. That is such a banal statement that one almost hesitates to repeat it, but its full bearing on the process of international economic disintegration is still far from being understood generally. It is not only the immediate effect of the breakdown of the gold standard on international trade and commercial policy which has to be considered, but also the deep change brought about in the national money and credit systems which, even if still adhering to an essentially liberal organization, have lost their tendencies toward self-adjustment under the influence of the new monetary system (e.g., the gold sterilization in the United States or the working of the Exchange Equalization Account). This, in turn, has largely contributed to that spread of conscious central control of the national economic process which bears so much responsibility for international economic disintegration.

It is equally clear, however, that such a statement cannot carry us very far, in view of the other fact that international economic disintegration owes just as much to the breakdown of the gold standard as the breakdown of the gold standard to it, so that the breakdown of the gold standard thus appears both as cause and effect. It is another example of a vicious circle and of that deadlock in historical analysis which is always the result of such a state of affairs, to the great tactical advantage of those who approve of the cumulative process of international economic and monetary disintegration.

The problems awaiting us in this field are extremely interesting and important. At the same time, they are also so intricate and complex that here perhaps more than anywhere else the author must resignedly acknowledge the sheer impossibility of doing in this book much beyond stating the problem and suggesting further studies on the basis of the general philosophy laid down in these pages.1

In order to make clear what the problem implies we must begin by stating the bare fact that the old international monetary and financial system, based on the gold standard and on the auxiliary arrangements in the financial sphere, which had made the world virtually a payment community, is no more, and that the prospects of its restoration in some form or another have gradually become more remote. It has been replaced by a set of monetary and financial relations and arrangements which it would be unduly euphemistic to call a system at all. The changes which have occurred in this field during the last decade may be said to centre around the rival concepts of monetary liberty and monetary stability. That is to say: the old monetary system characterized by the legendary gold standard has been fundamentally modified everywhere in the direction of international monetary disintegration and monetary nationalism, but in one set of countries it is the liberty of international monetary transactions which has been primarily sacrificed, whereas in another the stability of the exchange values of the different currencies. It is, of course, to be understood that there are in fact all shades of combinations to be found between these two alternatives, of which the one is that of exchange control and the other that of the system of more or less free exchange rates, with Great Britain as the best-known example. The whole situation can be summed up by saying that nowhere has it been thought possible in the end to preserve both external monetary liberty and external monetary stability in the storm of the economic dislocations during the last decade. Apparently a choice had to be made everywhere between the one or the other with the sacrifice of the corresponding alternative. The desperate struggle of the countries of the gold bloc, before it gave way in the autumn of 1936, is a dramatic illustration of this growing incompatibility of those two prerequisites of monetary internationalism, external monetary liberty and external monetary stability.

Very few will hold the opinion to-day that, even within the sector of the free exchange system practising no exchange control, a new equilibrium had been found after the series of devaluations so that a new situation was in sight where monetary liberty could again be combined with monetary stability, if not de jure, then at least de facto. The exchange rates within this sector even before the war were still wildly fluctuating, and, what is more, almost all countries concerned were more or less determined to preserve the right and the possibility of making drastic changes in the external value of their currencies whenever they considered it advantageous. What there was of international monetary stability was stability “cum dolo eventuali”; and it is surely of the deepest significance that the only crystallization of some sort of an international monetary system, viz. the Tripartite Agreement between Great Britain, United States and France, was subject to a notice of 24 hours. The last state of world economy could, in fact, find hardly a better and more telling expression than in the term “24-Hour Standard.” An entire epoch is revealing itself here: its hand-to-mouth character, its utter lack of principles and norms, its insecurity, its abhorrence of binding rules in international relations, its drift to unknown destinations.

This is not the place to discuss the technical details of the different systems now in practice, to describe the rôle which gold is still playing to-day, and to point out the difference between the various types of exchange control or free exchange systems. Nor is it possible here to go into an analysis of the numerous and complex reasons of the breakdown of the old system and to derive from such an analysis conclusions as to the ways and possibilities of putting a new international monetary order in the place of the ruins of the old one. Finally, it must be understood that in the present context it cannot be our intention to join the heated controversies about the merits or demerits of the different monetary systems. At the present stage we are not concerned with technical description or with causal analysis or with policies or judgments of value. The only question concerning us here is the simple N 193 phenomenon of international economic disintegration in all its various manifestations. What we have to ask ourselves, then, is whether the developments in the monetary-financial sphere of world economy signify disintegration or not, no matter how they may be judged from any other point of view. To this specific question only one answer seems possible: the recent changes in the monetary-financial sphere of world economy are not only the result and the symptom but even more one of the most potent agents of international economic disintegration, which is simply inconceivable without them. If one had to define what international economic disintegration really means, one would indeed hesitate as to whether more stress should be laid on the shrinkage of the total volume of world trade, on the qualitative changes as they have been discussed in a previous part, or on the “nationalization” of money which is the topic of this part.

In order not to let this appear a mere—though evident—assertion, it seems well to apply a definite criterion of economic disintegration by raising the question whether this or that development in international trade is widening or shortening the gap between domestic and international trade. That this is a fair measure of the degree of economic integration nobody will deny, since the more the character of international trade approaches that of domestic trade the greater will be, other things being equal, the degree of international economic integration, and vice versa. By applying this measure we arrive at a statement which implies no arbitrary judgment of value. It is a measure which can be usefully applied to each and every development in international trade during the last ten years, and it will appear worth-while to reconsider in this light what has been said in the preceding sections on bilateralism, the erratic character of present world trade and other symptoms of international economic disintegration. Applied now to the recent changes in the monetary-financial arrangements of world economy, it can show only one thing, i.e. that also in this respect—or perhaps in this respect more than in many others—the difference in the degree of economic integration between domestic and international trade has become much greater than before, whereas contemporaneously national economic integration has undoubtedly increased rather than decreased. Thus there is no escaping the conclusion that the break in the previous monetary system of world economy means more international disintegration, at least relatively to national trade.

That among the two monetary systems of the present day the system of exchange control is par excellence an element of international economic disintegration in the exact sense explained just now seems obvious and undebatable. If it was not in all cases its expressed purpose from the beginning, it is at least its inevitable result in the end that it makes the national economy in question a more or less closed system by multiplying the possibilities of severely and consciously controlling all transactions in foreign trade. By accomplishing what the Germans call the “closed money circuit” (geschlossener Geldkreislauf) and by providing the exterior framework both for national planning and for the highest degree of national autonomy in money and credit policy, exchange control is a powerful agent for enhancing national economic integration at the expense of international economic integration. At the same time, exchange control—practised at least by one of the participant countries—is the indispensable pre-requisite for clearing agreements, representing the strictest form of bilateralism, so that exchange control is indirectly responsible also for this undisputed phenomenon of international economic disintegration. If there should remain any doubt about the validity of these considerations it may be dispelled by mere reflection on what it would mean for national economic integration if the different provinces within a country were to put up regional systems of exchange control.

Whereas the highly disintegrating effect of exchange control is so obvious and powerful that it must be regarded, indeed, as one of the culminating points in the present international economic disintegration, it is much less clear that the other monetary system which has recently replaced the previous gold standard, i.e. the free exchange system, must be considered also a factor of international economic disintegration, though of a much milder kind than exchange control. In this respect, different opinions have been held at different periods, and it cannot be truthfully said that the problem of what the world-wide stability of exchange rates means for international trade has found a solution to-day which is universally accepted—a fact surely testifying to the rather complex nature of the problem. Up to about 1931 the conviction that the rigid exchange-rate stability brought about by the universal gold standard was beneficial and its replacement by a free exchange system detrimental to world trade dominated and was hardly disputed; but after the gold standard had been given up by leading countries under the pressure of well-known circumstances the opposite habit of minimizing the importance of external monetary stability became fashionable and was backed by high authority.2 Though admitting that the free exchange system involves greater risk and uncertainty for international trade and international transactions, the representatives of this new heterodox view asserted that this effect must by no means be overrated and that there were technical devices—especially the use of the forward exchange market—for reducing the monetary risk if it should be really deterrent. At the present moment, however, it seems that current opinion is again swinging round and recognizing that there is decidedly more in the old orthodox view than the advocates of a free paper standard had supposed. Weighing all the arguments on both sides, the present state of the discussion does not leave any doubt that the disintegrating effect of the free exchange system is far from being negligible, though it is also evident that in this respect it cannot be compared with the exchange control system.3 Without going, at the present juncture, into the intricacies of the business cycle aspect of the problem we may take it as an established fact that the uncertainty involved in the free exchange system is a decidedly troubling element in international trade which, other things being equal, will mean less international trade or a qualitative distortion in the currents of international trade. This effect will be the greater the more important the time element is in international economic transactions. For this reason, international long-term investments will suffer most, while, on the other hand, the uncertainty of exchange rates is bound to foster the hectic movements of international short-term capital migrations so that, in this way, the free exchange system also adds to the forces responsible for the erratic character of world economy to-day. But it is not only the individual business psychology which is affected by the uncertainty due to the free exchange system. Equally important is its adverse effect on the readiness of governments to conclude long-term commercial treaties in a liberal spirit. And, again, if there remains any doubt about the validity of the foregoing arguments the simple question should be asked what it would mean for national economic integration if the various provinces of a country were allowed to have regional paper standards with free exchange rates toward each other. In this respect, it is not necessary to overstrain one’s power of imagination since it is exactly the situation to be found in a country like Germany before the unification of the monetary system in 1871, and still existent to-day in those of the most backward countries of the world having regional exchange rates. To overcome this medieval state of affairs has been regarded everywhere as a prime condition for national economic integration, and the world-wide spread of the gold standard toward the end of the nineteenth century was nothing else than the spatial extension of the area integrated by a common monetary system. Seen in this light, the free exchange system appears as a notable retrogression in the development of economic integration, however desirable it might appear from a nationalistic point of view.

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4 Among the vast literature on the subject a special reference should be made to the books by Michael A. Heilperin, International Monetary Economics, London, 1939; and by Attilio Cabiati, Il Sistema Aureo e il Fondo di Congaglio dei Cambi, Turin, 1940. The following outline of the main subjects to be further analysed would perhaps accord best with the general spirit of this book:

1. Factual account

(a) the pre-war system and its conditions;

(b) the period of post-war restoration;

(c) the break in 1931 and the subsequent period.

2. The different manifestations of disorder.

3. Analysis of causes.

4. Appraisal of the effects, with special regard to the effect on economic nationalism.

5. Monetary policy as a substitute for or a supplement to protectionism.

6. Critical account of theories and ideologies.

7. Remedies.

5 A good account of this attitude will be found in: Frank D. Graham and Charles R. Whittlesey, “Exchange Rates, Foreign Trade, and the Price Level,” American Economic Review, September, 1934, pp. 401-416.

6 A good sample of this well-established view is Professor Gregory’s contributions to the collection of memoranda on “The Improvement of Commercial Relations between Nations and the Problems of Monetary Stabilization,” ed. by the International Chamber of Commerce, Paris, 1936. The whole problem of the integrating or disintegrating effects of the various money systems has been penetratingly studied by Professor F. A. von Hayek in his book on Monetary Nationalism and International Stability, London, 1937.

• 1Cf. my paper “A Value Judgment on Value Judgments” in which I am explaining my attitude in this very important methodological question. It will probably be published in the “American Economic Review.”
• 2The following pages are largely based on a memorandum which the author wrote together with Professor Alexander Rüstow (University of Istanbul) in the summer of 1938.
• 3See also: W. Röpke, Die entscheidenden Probleme des weltwirtschaftlichen Verfalls, Zeitschrift für schweizerische Statistik und Volkswirtschaft, 1938, No. 4.
• 4The purpose of this book is to make a new and more promising approach to the diagnostics of that long-run crisis in international economic relations which is one of the most striking symptoms of the general economic, social, and political crisis of occidental society. I believe that the urgent necessity of such an approach has been enhanced rather than diminished by the outbreak of the war. However, I would betray my own philosophy if I regarded this book as anything more than a mere beginning, an invitation to constructive criticism, and a way of opening or furthering a discussion for which the world seems to be ripe. In submitting this book to criticism, I am not afraid to expose myself as one who believes not only in the scientific legitimacy but even in the utmost scientific necessity of employing a measure of judgments, which is ultimately based on a definite conception of what is wrong with the world, and of what should be done in order to put it right again. Those who are shocked by such an attitude may be reassured that I gave more thought to this methodological problem than I am able to explain on this occasion.
• 5(b) This crisis puts social science in a new situation, which is itself highly critical and which no partial investigation in any field of this science whatever can ignore without running the risk of missing its aim. Nobody conversant with the current development of the social sciences can overlook the fact that the feeling of being on insecure ground is becoming more and more widespread, until even the most tenacious followers of the traditional lines of approach sense the need for reorientation. The growing literature on methodological questions even in countries like England, where it was formerly distinctly unpopular, is a sure token of this scientific situation, as is also the fact that it has been felt necessary to open the present report in such a roundabout way as would have appeared rather strange even five years ago.
• 6As the present historical crisis finds its first, its most painful and its most conspicuous manifestation in the economic sphere, and since the nineteenth century has accustomed us to treat the economic problems as the main ones, it is easy to understand why the crisis is conceived primarily as an economic one and why, therefore, the traditional approaches of economics have been relied upon thus far. Whether or not this traditional conception corresponds to the inner convictions of our scholars and statesmen, it is at least exemplified in the character of by far the greater part of scientific activity in our field. Accordingly, men and means have been mobilized, during the last ten years, on an unprecedented scale. Facts have been piled up sky-high; conferences have been held in endless succession; economic analysis has been brought to an ever greater degree of refinement (and, incidentally, to an ever greater degree of unreality); vast and detailed programmes of research have been elaborated; a complicated machinery of institutionalized science has been set up; and questionnaires have been sent to almost every country and to every section of the population. It would surely be no pessimistic over-statement to say that nobody feels that this hectic activity has brought us any nearer the fundamental diagnosis which alone could serve as the basis for effective therapy.