World Money Reform

September 7, 1964

After ten months of study, the monetary experts of the ten leading industrial nations of the free world have come up with their report on what should be done about the world’s currencies. At the same time, the International Monetary Fund, with 102 national members, has brought out its own recommendations.

The two reports, in substantial agreement, are what might have been expected. They reject all “extreme” proposals, such as the creation of a new international paper money issued by the IMF, or turning the IMF into a super-central bank that could create reserves internationally much as the Federal Reserve does domestically. Nevertheless, they propose that the IMF be beefed up substantially and quickly, and that this be done in some way that won’t cause a heavy drain on the U.S. gold stock.

The main proposal is that the resources of the Monetary Fund be raised by a “moderate general increase”—say, 20 to 30 percent—in the quotas of the member nations. If this boost is adopted, it will be on top of a 50 percent increase in 1959.

What lies behind this proposal (and behind the far more inflationary proposals that the “group of ten” rejected) is the fear of a “shortage of international liquidity”—the fear that, unless the new gold produced annually is progressively supplemented by new money and credit, there will not be enough to keep pace with and to finance the growing volume of world trade, and that a shortage of “liquidity” would force the world into deflation and unemployment.

MISPLACED FEARS

These fears appear groundless. Accepting the Monetary Fund’s own estimates, let us suppose that world trade rises by at least 4 percent a year in the next decade, while gold holdings (and even the credit based on them) do not rise more than 2½ percent a year. What would happen?

There would, of course, tend to be a gradual lowering of world prices of, say, about 1½ percent a year. Would that be something to dread? Would it wipe out profit margins? Would it precipitate heavy unemployment? There is no reason to suppose so. Prices would tend somewhat lower simply because the supply of goods was increasing faster than the supply of gold. As, in all probability, real and money costs of production would be falling at about the same rate as final prices, there would not necessarily be any real shrinkage of profit margins, or any reason for increased unemployment.

Everyone seems to have forgotten that balanced economic growth can take place quite successfully even with moderately falling prices. An outstanding example of prosperity with falling prices occurred between 1925 and 1929, when full industrial activity was maintained with an average drop in wholesale prices of more than 2 percent a year.

THE DANGER IS INFLATION

The real monetary danger that this country and the world face today is not “shortage of liquidity” or deflation, but a continuance and acceleration of the inflation that has been raging since the end of World War II. This world inflation has coexisted with the life of the Monetary Fund. Of the 48 or so members of the IMF in 1949, practically all except the United States devalued their currencies that year following the devaluation of the British pound. Of the 102 present members of the IMF, the great majority have either devalued since they joined, or allowed their currencies to fall in value since then as compared with the dollar. And the dollar itself, since 1945, has lost 42 percent in purchasing power. In the last ten years alone the German mark has lost 18 percent of its purchasing power, the British pound 23 percent, the Italian lira 25 percent, the French franc 34 percent, and leading South American currencies from 91 to 97 percent.

This is no mere coincidence. It is largely the result of the IMF system itself, which was set up at Bretton Woods by Lord Keynes and Harry Dexter White expressly to allow nations to escape from the discipline of a real gold standard. And all the ingenuity of today’s monetary “reformers” goes into concocting still more devices to enable world inflation to go on without any government having to allow its citizens to convert its depreciating money into hard gold.