International Monetary Economics

CHAPTER I

THE NOTION OF MONETARY INTERNATIONALISM

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THE notions of an “international monetary system” and of “monetary nationalism” are both familiar and much discussed. By the former one usually means the gold standard; by the latter, the various types of “managed currency” combined with fluctuating exchanges. The question arises, however, as soon as one proceeds to a more thorough analysis of the concepts involved and of historical experience, whether the gold standard at its best has ever been an international system and whether monetary nationalism is a quality of a particular monetary system such as a “managed currency”, or of a more complicated network of economic, and even extra-economic, policies and conceptions. And this involves further inquiries: what is the condition of existence of an “international system”; can any monetary system (national) be “non-managed”; has the fact that gold was the basis of the only known “international monetary system” been the fundamental cause of its success or was it only a convenient method of administering a “system” the causes of whose success are to be found elsewhere? The questions are numerous and important and they grow in number as one proceeds to a more penetrating analysis of the processes and relationships involved. The importance of the inquiry is great, both for knowledge and for practical life; as indeed the progress of economic theory is necessary (though not sufficient) for the improvement of economic relations in actual life. In the field of monetary affairs, improved policies can only be devised by means of improved knowledge, and upon those policies much of the future prosperity of the world depends. The monetary reconstruction of the mid-’twenties was the failure we know because of erroneous conceptions behind it; or at least to a large extent because of them. In many ways our knowledge of the working conditions of the pre-war gold standard is inadequate; various conditions, monetary, economic and political, contributed to make that experiment in monetary internationalism the signal success it has been; to know these conditions is a prerequisite to making another such successful experiment. International monetary stability—or stability in international monetary relations—is a good ideal, worth struggling for by all those who believe that growing prosperity amidst organized peace is the most important achievement to be obtained in the field of economic and political human affairs. To attempt a reconstruction without investigating the conditions under which the reconstructed “system” can live and prosper would be tantamount to preparing another collapse. The recent experience of the ’twenties should be a deterrent example.

In the preceding paragraph, the word “monetary internationalism” has been used. It requires detailed comment, especially since it is used so often in this book. What is the relation of the concept of “monetary internationalism” to that of an “international monetary system” on the one hand and to that of “monetary nationalism” on the other?

Let us discuss the second point first. Both monetary nationalism and internationalism are policies, opposed in their aims and, therefore, in their means (unless, of course as it often happens in the actual world, means are adopted while aims are still undefined and thus the normal, reasonable relationship between the former and the latter gets reversed!). Now in a world divided into a certain number of sovereign States, policies are national. They are national not only when they are independent of policies carried out by other States, but also when national policies of the different States (some or all) are co-ordinated and harmonized with one another. It may seem a commonplace, but it is essential to realize that even policies resulting from an international agreement are national policies. What can be called an “international policy” is a set of co-ordinated national policies, the aims and means of which are combined into an alleged harmonious whole. We can then describe the individual national policies as “internationally minded” and speak of “internationalism”. The difference between that and nationalism is to be found in the fact that the latter subordinates the state of international relations to the realization of purely national objectives. We shall elaborate this point later.

As regards the international monetary system, the expression is ambiguous, and in order to give it a more precise content it is necessary to sacrifice the full implications of either “international” or of “system”. If the term “system” is given a vague significance instead of its usual well-defined rigorous meaning, then the expression under discussion can be used to denote the same thing as “monetary internationalism”, though the latter term seems to be preferable because less ambiguous. If, on the other hand, we use the term “system” in all its rigour, then we have to modify the significance of “international” and speak of what should more properly be called a “world monetary system”, i.e., the monetary system of a World State. There is a third possibility which we shall discuss presently.

In opposing international relations to relations in a World State we find the principium divisionis in the situation of sovereignty. The World State implies a single State sovereignty throughout the world, the organization of the world into one Federal State.1 Such a State would have the possibility of establishing a unified monetary system, a world currency administered by a World Central Bank.2 Within the Federation would exist inter-state relations of the same kind, for example, as those that exist between the States composing the United States. In the field of monetary relations there exists a single currency and a single source of ultimate decisions about important matters of policy. No international relations exist at all in that hypothetic case. There are international relations only where a multiplicity of sovereignties exists. International relations are relations between sovereign States.3 Policies of such States are national policies; they can be devised in a spirit of nationalism or of internationalism, according to the emphasis laid upon international relations as compared with purely national preoccupations. The climax of internationalism would consist in an agreement reached between individual States regarding their policies (monetary and economic ones in our case) such as to approximate very largely to conditions that would exist in a single World State. Only if a comprehensive international convention establishing the aims and methods of national monetary policy were to be formally adopted could one speak with any rigour of an “international monetary system”. This is the third sense of that expression to which an allusion was made above. In that sense such a system has never existed in the past. The condition of its realization in the future is the willingness of the different States to give up a part of their sovereign rights “to regulate the currency”, by accepting manifold obligations under an international monetary convention and by vesting in an international body the right and obligation of deciding whether national policies conform to the accepted standards. It is clear that we are very far away from the acceptance of such a system in practice. The pre-war system worked largely as if a convention of the kind described had been concluded; but as we shall see in a later chapter this was due to the acceptance of a common monetary standard and to the unquestioned prestige of London as international financial centre. We thus fall back upon national monetary policies freely adopted by national governments and national central banks. To-day sovereignty in these matters is more jealously guarded than ever, and, therefore, it is better to speak of internationally minded national policies (or internationalism), as opposed to nationalistic national policies, rather than of “international systems”. For this reason, and in this sense, the expression “monetary internationalism” will be used throughout this book. We shall now turn to examining in detail the concept and the reality that it describes.

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In his recent book on Monetary Nationalism and International Stability,4 Professor Hayek defines monetary nationalism as follows:

“By Monetary Nationalism I mean the doctrine that a country’s share in the world’s supply of money should not be left to be determined by the same principles and the same mechanism as those which determine the relative amounts of money in its different regions or localities.”5

This definition does not strike me as very happy. There is a fundamental difference between monetary relations within and between countries (i.e., States) and such relations within and between areas or localities of the same country (i.e., a State). There is such a direct economic datum as “a country’s supply of money”, but “the world’s supply of money” is nothing else than a summation of the money-supplies of the different countries.6 There is a central control (more or less efficient) of the supply of money in a country and this total supply gets distributed between the different regions and localities of that country, none of which is endowed with the power of regulating the currency. If we consider, on the other hand, the world at large, there is no agency controlling its money-supply and therefore there is no such centrally determined supply which could get distributed between the different countries in the same way as the national supply of money gets distributed between different regions of that country. The world supply of money is a secondary, calculated magnitude and is the result of various national monetary policies. The mechanism determining the supply of money in the different countries of the world is a different one from that which determines the supply of money in the different regions of one country, because in the former case the power of regulating the volume of currency is vested in many sovereignties, while in the latter it is vested in one sovereignty only. It is most important to keep this distinction in mind when discussing international monetary problems. It is also important to keep in mind that the circulation of factors of production7 and of finished goods is free within a country and that it is subject to various restrictions in international relations. This is again due to the multiplicity of sovereignties and of national policies which plays such a great part in the shaping of relations we investigate. Professor Robbins8 and others are right when they attribute to the existence of sovereign States the emergence of certain problems which might not exist otherwise. In economics we should have to deal only with relations in a “closed economy” were it not for the existence of independent sovereign States. The World State would be a “closed economy”. One might add that international relations would not exist either, if the different sovereign States were entirely independent and entertained no relations whatever with one another. But in the real world this is even less likely to happen than the establishment of a World State. Neither the physical world nor human proclivities make the attainment of a generalized full autarchy a practical proposition. “Monadic” States are a material and human impossibility. Thus reality is a middle-ground between a single World State and a plurality of “Monadic” States; and so international problems are among the most vital. Professor Hayek’s definition of monetary nationalism consists in opposing conditions that exist in the real world, divided into interdependent and sovereign States, to conditions that exist within a single State and that would probably exist in a World State were it to come into being. Such a definition is not fruitful because it is likely to give too broad limits to the notion of “monetary nationalism”.

One case might be mentioned here in which the international situation may approximate to the situation existing interregionally in some one country. The case is one where no national monetary policy exists at all, when gold coin is the only circulating medium all over the world. But even here additional conditions have to be fulfilled to approximate to purely interregional relations: viz., that the weight of the coin cannot be changed in any one country;9 that no restrictions can be imposed on movements of specie to and from any country; that trade must be free. Generally speaking even in this case the condition of establishing the same situation in international monetary relations as would exist in interregional relations consists in all governments desisting from the exercise of their sovereign rights in all economic matters.

If we grant the unlikeliness of anything of that sort, we must introduce the element of national policies and conduct the discussion in terms of concepts similar to those used in the first section of this chapter.

It is often thought that discussions about sovereignty are an exclusive prerogative of jurists. We must recognize that the notion and its implications carry an enormous weight in the discussion of economic relations.

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The principal effect upon world economics of the multiplicity of economic sovereignties consists in the emergence of the problem of the balance of payments. Many economists rightly contend that this problem would never arise were it not for the independent working out of national economic policies. Such is for example Professor Robbins’s view in his recent book on Economic Planning and International Order; he seems however to underrate the importance of the reasons that cause the problem of balance of payments to arise, by limiting them to the existence of independent national monetary policies.10 The economic effects of the multiplicity of sovereignties are not confined to monetary policies; trade policies and migration policies are also important elements of the situation under discussion.

The seemingly puzzling question in connection with investigating and discussing balances of payments is this: why does one pay so much attention to international, and no attention whatever to interregional, balances of payments? If one takes the different regions of a country, their trade and their financial relations could be summed up in a regional balance of payments. Such a balance would show a deficit or a surplus, and money would accordingly flow to (or from) the region in question from (or to) other regions. In watching the situation of banks in different regions one could find a certain indication of the changes in the money supply that follow the development of the respective “balances of payments”. Reference has been made in section 2 above to the distribution of the national supply of money between different localities or regions. That distribution follows payments made between localities and regions. If the population of Sussex pays out more money to people or institutions, including the Government, outside Sussex than it received in payment from them, the supply of money (including bank money) in Sussex will fall; in the opposite case it will rise. This can be compensated by interregional credit, e.g., the Sussex branches of the Joint Stock banks can be indebted to the head office, or (in effect) to branches in other parts of England. Or, similarly, some State of the United States may have a “passive” balance of payments, which would involve either a shrinkage of its money supply or an increase of the debt of its banks (Federal Reserve Bank and other banking institutions) contracted in other States of the Union. If we leave out the compensating credit transactions, an “unfavourable” balance of payments of Sussex will result in a reduction of the money supply in Sussex, and similarly a “favourable” balance of payments of the State of Missouri or of New York City will increase their respective supply of money.

Now it is argued that the only reason why it need not be so in international relations is that sovereign States can control their money supply and thus prevent net payments made abroad from reducing the volume of national currency or net payments received, from increasing it. The fact that sovereign States can act in this way is incontrovertible, though their action is justified by some and blamed by others.

The problem is complicated by the fact that in inter-local and interregional relations certain quantities of one and the same currency move from one place to another, without ceasing to be a generally acceptable means of payment. Not so in international relations, when one national currency has to be converted into another national currency in order to effect the payment. The amounts of national currencies exchanged for one another depend upon the position of the respective balances of payments, and upon them, in turn, depend the rates of exchange. Balances of payments came to the foreground because net payments between countries give rise to fluctuations of the rates at which one national currency is exchanged for another. If movements of commodities, money and men were as smooth and easy between countries as they are within countries it is possible that rates of exchange would not fluctuate and that the mechanism of such fluctuations would not have become a subject of economic studies. We shall discuss this problem later. Actually, however, factors of production do not move as easily in one case as in the other, and this has consequences for national monetary policies. In a world divided into sovereign States balances of payments are an important economic factor because of their bearing upon exchange rates between currencies. To admit this is by no means making a concession to mercantilists. The maintenance of a stable equilibrium of balances of payments is an important condition of stability in international economic relations; and as balances of payments have always a tendency of not being in equilibrium, or not keeping in equilibrium, it is clear that they should attract the particular attention of economists. The mechanism of international payments, and the mechanism of restoring the disturbed equilibrium of balances of payments, are the basic problems of international monetary relations. And this throws us back upon the question of policies.

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Policies, monetary and economic, can be directed towards different objectives, but inasmuch as it is the object of those who are framing them to maintain and increase general welfare, they will be determined by considerations of stability. It may be stability to maintain or stability to achieve; it may be stability defined by purely national considerations or stability defined in terms of international relations.

The former distinction is less relevant than the latter, because as the thing to stabilize is prosperity, as the thing to maintain is stability in a prosperous development, the two objects: (1) of attaining a balanced condition of economic life and, (2) of maintaining that condition, are closely linked to one another.

It is the distinction between purely national and international criteria of stability that is so important for monetary internationalism. Usually the dilemma is said to be one between the stability of internal (or national) price levels and the stability of rates of exchange between the different national currencies. According to that view one has to choose between keeping stable the “purchasing power of money” in terms of commodities and services within a country, and keeping stable the purchasing power of one currency in terms of other currencies, i.e., the exchange rates. The choice of the former policy makes it possible, it is argued, to maintain economic stability within a country without exposing that stability to dangers coming from abroad. The choice of the latter policy makes it possible to maintain a fixed relationship between the different national currencies, and therefore, one argues, it creates a situation which—to some extent at least—resembles one that would exist in a World State with a single currency. We shall discuss these contentions in greater detail in later chapters, speaking of the gold standard and of “independent” currencies. Here it suffices to point to the fallacious nature of the “dilemma”. Let us grant—though the contention is untenable—that stable national price levels are tantamount to national economic stability. Let us also grant—though here too, doubts are legitimate—that absolutely fixed exchange rates are a condition of international stability. It still remains to be proved that one has, in practical policy, to choose between the two, or—at least—that one has entirely to sacrifice the one to the other. The very fact of international trade ought to convey a warning to advocates of a choice! Fluctuating exchanges must affect the formation of prices within any one country, and do so to an increasing degree as foreign trade plays a more important part in the economy of a country. Countries which are working with imported raw materials could hardly maintain stable internal prices when exchanges of the countries from which they import raw materials fall or rise. If advocates of internal stability, as opposed to international stability, would state their case in terms of the structure of prices and not in terms of average price levels, they would see at once that their case is very weak, unless, of course, they go on to condemn the whole of foreign trade as a disturbing factor and proceed to advocate a policy of autarchy. On the other hand it is difficult to conceive of the maintenance of international monetary stability when there are unstable conditions within the various countries. The dilemma is thus, it seems, more apparent than real.11 It has its source in a rather oversimplified theory of the functioning of the gold standard—which we shall discuss at greater length later. However fallacious it may be, the dilemma has nevertheless gained wide currency and inspired the advocates both of monetary nationalism and of the “international monetary system”. The former hold the view that the monetary policy of a country must be governed merely by considerations of national stability. What with fluctuating exchanges, with national policies inco-ordinated with one another, with commercial and financial policies also determined by nationalistic views, world trade and international economic relations become sacrificed on the altar of “national stability”. Nor are staunch adherents of international stability in very much better case when they subordinate internal to international stability; for they make their aim appear a too expensive one to be really worth striving for, and in times of stress they render too easy the collapse of their chosen policies.

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Monetary internationalism does not consist in choosing between the two alternatives and preferring international to national stability. It rather views the one in relation to the other and makes the attainment of one conditional upon the attainment of the other. As we have seen, internationalism, as defined, is based on the assumption that there exist independent and interdependent States, each of them having the right of determining its policies. The assumption is realistic and therefore establishes a proper basis for practical policy. The existence in each country of a monetary system based on a common standard, and organized according to a common technical scheme, is not a sufficient condition of the workability of monetary internationalism, as the experience of the ’twenties has conclusively shown; nor is it perhaps an indispensable condition. What is important is that the monetary policies of the different countries should be co-ordinated and that some system of adjusting balances of payments, until one reaches a condition of durable equilibrium, should be workable. As regards the first condition, it means, in effect, that if the business cycle policies practised in various countries are widely different, some consisting in expansion, others in deflation, international monetary stability cannot be maintained. It means that the agencies responsible for the framing of monetary policy in the different countries must keep in touch and act in common accord in devising policies. The second condition consists largely in what is sometimes called “the rules of the game”. Financial and commercial policies, not only in foreign relations, but at home also, must be so devised as to make adjustments of balances of payments, and the real transfer of net payments, possible and smooth. To compare international to interregional relations is here of but little use, as the mechanism and the general conditions are different. That point has been already discussed. Whether a common monetary standard, or concretely the gold standard, is a necessary instrument of monetary internationalism is an important problem to the analysis of which we shall turn presently. But we can say even now that conditions of monetary internationalism are wider and deeper than the technicalities of the monetary system. They include economic policies in the wide sense of the word, and the general attitude towards international relations.

• 1There is much difference between the views that are widely held in this matter in Great Britain and the United States, and views that are commonly accepted on the Continent. This explains the emphasis laid on that issue. Vide infra, pp. 68 and 69.
• 2The reader may find it useful in this context to contrast the United States’ unified monetary system, now embodying a Federal Reserve System, with what would have existed had each of the 48 States of the Union sovereign powers over its particular monetary system.
• 3The word “international” is used, of course, with utter disregard of its etymological significance; but this usage is universally recognized.
• 4F. A. von Hayek, Monetary Nationalism and International Stability, London, 1937.
• 5loc. cit., p. 4.
• 6Except when a World State exists.
• 7i.e., “real” factors of production (goods), monetary factors (capital) and, thirdly, labour.
• 8“In the last analysis . . . it is the political factor which gives rise to the economic problem of international monetary transfer. If historical accident had not created independent sovereign states . . . no such ‘problem’ would have arisen”. Lionel Robbins, Economic Planning and International Order, London, 1937, pp. 279–80.
• 9To change the weight of a coin (“debasement”) is analogous to the modern forms of devaluation. While, as we shall see presently, the expression “changes in the gold contents of a currency unit” is open to criticism, it shows at least clearly the analogy in question. But what Sovereign Prince of the days gone by would have accepted an international undertaking never to debase the currency? And even if he did accept it, this would be an analogous matter to the type of international monetary convention mentioned in an earlier part of this chapter. The Latin Union was to some extent an example of a limited convention of this kind. But it all goes to show that not even a general limitation of monetary circulation to precious metals would automatically insure a system which would work internationally in the same manner as a monetary system works within a country in regulating the supply of money in the different regions.
• 10loc. cit., pp. 270–80.
• 11Cf. my “Monetary Internationalism and its Crisis”, a chapter in The World Crisis, London, 1938, pp. 348 et seq.