Bretton Woods

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BOOKS APRIL 9, 1945

Bretton Woods

 

The United States government must soon pass judgment on the Bretton Woods Conference, in which the representatives of 44 nations proposed that there be set up an International Monetary Fund and an International Bank for Reconstruction and Development. It is no exaggeration to say that the peace of the world and the future of international political and economic cooperation hang in the balance. Failure of Congress to accept these proposals would have repercussions far transcending even the terribly important immediate issues. It is imperative, therefore, to weigh carefully once again the principal criticisms which have been made against Bretton Woods, to answer them fully and in detail.

Have the plans technical flaws?

The operations of the Bank and Fund are not easy for the layman to understand. With respect to technicalities, therefore, he must take a good deal on faith. For this reason it is vital to emphasize the fact that no economist, no banker, no international trade expert, whether in favor of the flans or opposed, has been able to find any fundamental technical flaw in either plan. There are no secret weapons, no hidden tricks. Literally hundreds of articles have appeared on the subject. Out of these, one and one only professed to find a mechanical defect in the Monetary Fund—that it would create a world shortage of dollars. This charge has never been sustained. Even those who oppose the Fund are forced to admit that a shortage of dollars would be in spite of the Fund and not because of it.

Only think what would be the reputation in Wall Street of anyone who succeeded in finding a defect in the Fund’s operation! If hostile scrutiny has revealed no technical defects, we may be sure there are none.

Were the plans hastily devised?

Almost three years ago the proposals appeared in their original form. Since that time there have been innumerable conferences between the experts of 30 nations—bankers and central bankers, finance ministers and treasury officials, economists and foreign-trade experts. For five and a half weeks at Atlantic City and Bretton Woods, representatives from all the United Nations spent 15 hours a day going over every detail of the proposals.

Throughout, the interested public has been in on the debate. People, such as myself, with no official or unofficial connection with any of the discussions, have been able to keep informed as to every question involved. Congressional representatives were at the conferences, and in the half year which has since elapsed, every member of Congress has had full opportunity to steep himself in the relevant issues. The notion that six months from now new wisdom will be forthcoming simply cannot be taken seriously.

Do the plans involve a radical departure from the gold standard?

For a short period before the First World War most of the nations of the world were on the gold standard. Although it did not work automatically or without friction, the gold standard did operate tolerably well and did provide a measure of international stability. But between the two world wars the gold standard could not be reconstituted. In no five-year period were all of the important nations able to stay on gold. We could not go back to pre-1914 gold-standard “normalcy” prior to this war, and even less do we have the choice in the years ahead. The British Chancellor of the Exchequer, expressing the clear sentiment of the conservative and liberal public of that country, has said bluntly, “Certainly the attitude of His Majesty’s present government would be one of most vehement opposition to any suggestion that we should go back to the gold standard.”

The gold standard is thus not a practical alternative to Bretton Woods. If America rejects the Fund, Britain and the other nations of the world will be driven into exchange control, bilateralism and empire autarchy. Competitive exchange depreciation and instability will be the order of the day. Everyone will lose out, but the United States stands to lose most.

Actually the dominant members of the United Nations have a vital stake in gold; the Axis powers do not. The United States holds more than $20 billion of gold. Russia and the British Empire are great gold-producing units. Partly in recognition of this fact the United States, or “White,” plan won out at Bretton Woods over the Keynes clearing plan. Gold rather than “Unitas” or “Bancor” is to be the unit of account in the proposed Fund. Those who favor the gold standard should welcome the Bretton Woods compromise as the closest attainable approximation to what they desire. Those who dislike the rigidities of the gold standard will find most of their objections satisfied.

Let us see exactly what this means in concrete terms. Suppose after the last war, the Bretton Woods proposals had been adopted. This could only have been done over the strong objections of the banking community—and this time the British bankers would also have opposed the plans. Among them would have been Montagu Norman, the so-called mysterious mastermind of the Bank of England, whose efforts to restore the prewar gold standard were to end so disastrously. W. Randolph Burgess, the spearhead of the present opposition to Bretton Woods, who was then a younger and wiser man, would probably also have been opposed. Suppose, nevertheless, the plans had been adopted. How would the tragic farce of international finance have developed? Would those who like the gold standard be better or worse pleased with the results?

First, at the end of the war, there would have been a meeting to determine the new par values of all the world’s currencies. The English pound would not have wobbled for five years after 1920; or the French franc for seven years. More important, Winston Churchill, the Chancellor of the Exchequer, would not in 1925 have made the colossal financial blunder of giving the pound the old 1914 gold content. Believe it or not, the bankers of that day came out in favor of the same parity level as eleven years before, even though in the meantime Britain had lost much of her foreign investments, her price level had greatly increased, and the whole world price situation had changed. As a result of this incredibly stupid overvaluation of the pound, England suffered depression all through the late twenties when the rest of the world was prosperous. And to what avail? By 1931 her finances had become so strained that she was forced off the gold standard anyway, carrying the rest of the world with her. All this helped, of course, to create the world depression which was an important cause of the present war.

If the Monetary Fund had been in operation in the days after 1925, the mistaken overvaluation would not have been so serious. Britain would have been able to offset her loss of exports by internal expansionary policies. Undoubtedly a chronic adverse balance of trade would have resulted and the overvaluation would have been recognized. An orderly 10-percent depreciation of the pound would automatically be permitted. If the disequilibrium still persisted, a careful survey by the Fund authorities would decide whether further depreciation was desirable. If so, an orderly transition to a new level would be facilitated. Stability with flexibility is the keynote of the Fund—strength without brittleness. Most important, the other members of the Fund would be protected against the British depreciation by the requirement that the country which depreciates its currency must restore the previous gold value of its contributions to the Fund by making up the difference. Finally, the recurring fear throughout thetwenties of a world shortage of gold and a falling price level could have been met by an all-around devaluation with respect to gold involving no relative depreciation of any currency. In the great depression such a proviso would have been a godsend. Is it any wonder that economists, most of whom are very conservative admirers of the gold standard and still regard Roosevelt’s abandonment of it as the crime of ’33—is it any wonder that they are nevertheless today preponderantly in favor of Bretton Woods?

And is it any surprise that organized banking is opposed? Thus far bankers have had a clean record. They opposed formation of the Federal Reserve System. They opposed the Securities Exchange Commission. Most unbelievable of all, they actually opposed the creation of the Federal Deposit Insurance Corporation! Within the realm of their own operations, they peddled foreign loans in thetwenties which in retrospect—and at the time—no sane man could expect would be repaid. Even in their own interest, were they wise in pursuing any of these policies? One sometimes wonders whether more than good penmanship is required for the banking profession. Certainly, of the 50 committee members whose names grace the publication of the American Bankers’ Association criticizing Bretton Woods, not 10 have any pretensions toward expertness, and not 5 could pass an examination on Bretton Woods or on the gold standard or on exchange control. Of course, these are ad-hominem arguments as irrelevant as those on the other side. Certainly, Secretary Morgenthau could not meet the above requirements, and certainly Dean John H. Williams could. But if an appeal to authority is made, let us be accurate and call a spade a spade, a goose a goose, and a boob a boob.

Is Uncle Sam a Santa Claus?

The most frequently heard argument against Bretton Woods is the charge that the Fund is too large and is based upon unsound credit practices which inevitably will be abused, leaving Uncle Sam holding the bag. These arguments take many different and inconsistent forms, with logic extravagantly omitted in all cases. Nevertheless, because they mirror fundamental visceral distrust of government, they cannot be dismissed lightly and need yet once, again to be refuted.

The Fund is considered unsound in comparison with the Bank because under it countries can “automatically” borrow—a credit practice which is supposed to be inconsistent with traditional banking precepts. Even if true, taken by itself this would not constitute a very grave charge. Central banking has always—even in the days of Mellon and Strong—been based upon principles different from traditional banking practice, in exactly the same way that social security is everywhere operated on principles which differ from actuarial private insurance. But in point of fact, there are definite limitations upon the amount and duration of each country’s borrowings. Only one-quarter of a country’s quota is open to “automatic” borrowing in even a limited sense, and in view of the over-all safeguards built into the Fund and the desirability that each country shall have a sense of liquidity and certainty, this semi-automatic feature can be defended on its own merits.

What the critics really want is to institute a new “dollar diplomacy” in which under the guise of sound banking practice, pressure will be put upon other governments to conform to what the United States, and more specifically, Wall Street, thinks to be sound political action. It would be most unwise from the standpoint of international amity for us to undertake such policies even if we could getaway with them. Actually, no one with his feet on the ground seriously believes that the rest of the world would acquiesce.

That the critics of Bretton Woods are less than honest is nowhere better revealed than in the simultaneous charges: (1) Numerous countries have acquired during the war huge dollar and gold holdings making the proposed fund unnecessarily large. (2) The Fund will be exhausted within two or three years and the United States will be asked to pony up more gifts. Logically, these arguments are inconsistent and self-canceling, adding up to exactly zero.

The maximum United States liability under the Fund of some $3 billion is clearly defined. If necessary, this would not be an excessive price to pay for international stability. But there is no reason to believe that it will be necessary. No further assistance without our consent can be made and there is no prospect that any will be asked of us.

It is sometimes suggested that the Bank be given the power to make stabilization loans and that the Fund be abolished. Actually, the Bank does have the power to provide such loans, making the CED’s recent concern on this point unnecessary. But this only supplements the Fund’s credit operations. Moreover, the most important functions of the Fund lie outside the field of credit completely. It provides a mechanism for international cooperation toward national policies making for free and stable world trade.

Shall Bretton Woods be amended?

The opponents of Bretton Woods realize that every index of public opinion shows the American people to be in favor of its objectives. Therefore, it is considered the better part of wisdom not to come out directly against the plans, but simply to propose a few amendments. Thus, the American Bankers’ Association, which has been the single most active group fighting Bretton Woods, entitled its publication “Practical International

Organization through Amendments to Bretton Woods Proposals.” Twenty-five years ago, Henry Cabot Lodge, realizing that the American people were overwhelmingly in favor of the League of Nations, resolved explicitly to kill it by reservations rather than by direct opposition. How well he succeeded and at what grievous cost is a simple matter of history.

We must not make the same mistake this time. Today it is literally a case of all or nothing at all, of now or never. If the Bretton Woods proposals are better than nothing, they should be accepted whether or not they are considered to be perfect. Thus the recent friendly suggestion of the CED to amend the proposals would have been unfortunate were it not for the fact pointed out above that the present wording of the agreements appears to meet their objectives adequately. There is simply no practical machinery by which an international agreement, once formulated, can be modified. A second conference cannot be held, and if it could the same problem would again appear, leading to a perpetual merry-go-round. To try now to introduce minor changes will necessarily lead to the defeat of the whole enterprise. Every line in the two proposals represents a precise balance of compromise among all of the participating nations. Until adopted, the whole structure is an unstable one. Remove one part and the whole thing collapses. We would not accept unilateral reservations by other countries at this stage; we cannot expect that of them.

Isolationism is the only real issue now before Congress. If there is a clear line of demarcation between the friends and enemies of international monetary cooperation, the plans will be accepted. But if enough votes are found to kill them, let those responsible for the resulting international anarchy be clearly recognized.

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