Paper-Money Blizzard

October 14, 1957

The delegates to the International Monetary Fund, representing more than 60 nations, met, talked, heard speeches, and went home. No fundamental change was recommended. No one asked for a basic reappraisal of the whole tottering exchange-controlled paper-money system symbolized by the fund. The one general point of agreement seemed to be that U.S. taxpayers ought to dump more money in the fund to help bail other nations out.

Just before the fund met, however, the British Government made a courageous decision. It increased the bank rate from 5 percent to 7, putting it on the highest level since 1920. It was the only time in this century, except at the outbreak of the first and second world wars, that the bank rate had been raised by two percentage points in a single jump. In addition, Peter Thorneycroft, Britain’s Chancellor of the Exchequer, announced that the government had asked the banks to hold their loans during the next year to the level of the last year. And he pledged that expenditure by government departments and nationalized industries for building and expansion would be held at the present level for two years more.

WHY SO DRASTIC?

These measures are drastic. They will force the British Government and British business to pay substantially higher interest rates for new loans. They caused an immediate break in the security markets. And they were supplemented by a hint that the government would accept even unemployment in its determination to stop inflation and defend the pound.

But one question raised by this move seems to have been all but neglected. Why did Britain’s action have to be so drastic? The answer is that governments have broken their word so often regarding their currencies in the last quarter century that only the most drastic action will convince either foreigners or their own people that they mean to keep it now. The French franc has been devalued again only within the last few months. More than 50 different currencies have substantially depreciated in the last ten years. In Britain itself, Sir Stafford Cripps, in the months before he announced the devaluation of the pound on Sept. 18, 1949, had publicly denied a dozen times that he would devalue. Later, in defending this record, he declared self-righteously: “Even if we had then had some future intention of altering the rate of exchange . . . no responsible minister could possibly have done otherwise than deny such intention.”

UNIVERSAL DISEASE

But though the present drastic action by the British Government was necessary in the circumstances, the question may be asked whether it does in fact, even for the next year or two, give the assurance it was intended to give. British opposition leaders have already denounced the action. Another round of wage-increase demands is expected this autumn and winter. All the British Government can do, as long as Britain’s labor laws remain what they are, is to plead once more for labor-union “restraint”—a plea that has not proved very effective in the past.

Britain’s problem is a universal problem. It is merely a question of degree. When we look at France, India, or most of Latin America, the prospect of checking inflation is even darker. Even West Germany, which has been accused of making its currency too strong, is now threatened with an upward push on its price-wage structure.

The only place where any country’s currency problem can be solved is at home, by its own efforts, through the restoration of sound internal policies. Yet most of the delegates at the International Monetary Fund seemed to think it the fund’s duty to pour in more American dollars to subsidize their domestic socialism and inflation indefinitely. No one talked about a restoration of the international gold standard, which is treated as an impossible dream. In his welcoming address to the fund, in fact, President Eisenhower defined inflation as “the tendency to rising prices,” without once indicating that rising prices are merely the consequence of mounting snowdrifts of paper money. The IMF has not cured rotting currencies, but it has kept them inconvertible.