World Monetary Order

April 27, 1964

In a recent speech delivered in Johannesburg before the South African Institute of International Affairs, the eminent European economist, Wilhelm Röpke, called attention to the dangers both of our present “world without a world monetary order” and of American domestic policies that are weakening the dollar and “exporting inflation” to the rest of the world.

The prevailing impression is that the International Monetary Fund has given us a kind of world monetary order. Professor Röpke admits that this represents some improvement over the situation only ten years ago, which still deserved no better name than that of international economic disintegration. But he does not see the IMF system as one that provides any reassurance for the future. The present international monetary system, he declares, “has become an enormous world machinery for breeding and transmitting inflation.”

The United States, for example, because of inflationary policies, has a deficit in its balance of payments. This means that gold and dollars have been flowing abroad, where they become reserves against which Europe creates its own additional currency and bank deposits. But while these countries thus “import” inflation, the U.S. not only refuses to deflate but even to stop inflating.

U.S. WAGE INFLATION

“The root cause of the balance-of-payments difficulties of the United States is the internal wage and fiscal inflation which has been allowed to develop in that country during the last decade. The official assurances that these sources have been stopped carry little conviction because both wage inflation and budget deficits financed by bank reserves rather than by genuine savings have increased without interruption. It is not sufficient in the American case merely to hold wage increases within the limits which the government has designated as . . . socially desirable.”

Röpke goes on to quote in support of this judgment the words of Dr. Holtrop, the president of the Dutch central bank, in his annual report: “In the private sector the exports of both goods and capital would without doubt be favorably affected by a lowering of American production costs. To this cost aspect, however, too little attention is as yet being paid. Most of those who discuss wage policy at all confine themselves to saying that wages must not rise more than the improvement of per capita productivity permits. But in the case of countries with an obstinate balance-of-payments deficit that standard is inadequate. Countries in that position can perhaps stand some raising of real wages, but hardly a rise of nominal wages.”

A RETURN TO GOLD

Professor Röpke continues: “Since the American monetary authorities, however, dare neither to let the unemployment caused by trade-union power take its course nor to neutralize it altogether by a correspondingly full measure of inflation, the sad result is that the United States is that country which, in the midst of all its incomparable wealth, has managed to have both some measure of inflation and a large volume of unemployment, in other words, the worst of two worlds. The intemperance of the American unions is, in turn, bolstered up both by the Administration’s policy of deliberately favoring organized labor and by its overall economic philosophy. The latter is based for the most part on monetary expansionism of a rather extreme kind. . . . In the meantime, no stone is left unturned to mobilize foreign help for supporting the sick dollar.”

But as Professor Röpke points out, this cannot cure the real illness. The immediate solution is a reform of American policies, and the ultimate solution is a world return to a full gold standard.

Readers of this column will not be unfamiliar either with the diagnosis of the defects of the IMF system, the criticism of American fiscal, monetary, and labor policies, or the proposed cure of a return to the full gold standard that Professor Röpke recommends. But I report his views in the hope that Washington will be more impressed by this testimony from one of the outstanding authorities in Europe.