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PLANS FOR INTERNATIONAL CURRENCY STABILIZATK
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(By H. M. Evans, Member, Board of Governors, V.,^
Federal Reserve System, Washington, D. C.)
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[194-3?]
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covers^
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RESERVE- S ^ r /
A great deal ox" study has been given to a program for creating
^ international currency stabilization fund in the postwar period. A
currency stabilization fund would be important and useful but we should
n
°t lose sight of the fact that the mechanism of such a fund cannot, by
itaelf, bring universal prosperity. When all is said .and done, it is
pimply a machine for doing a'job, and unless the conditions in the respective countries are carefully watched and are favorable to agriculture,
industry and commerce, the machinery of a fund would not work at all and
t-io fund by itself could not change these conditions. True, recommendations might be made to countries but the countries themselves have their
^
legislative and administrative machinery .for making these changes and
hey are not going to act in accordance with the.desires of other counties unless they are certain such a course would be in their own best
interests.
Several of these programs were discussed at a recent meeting
one of those present asked whether or not the stabilization fund would
°Perate to deprive industry of tariff protection. Such a question indic e s that some people are expecting this machinery to undertake things
.nat are far beyond its scope. The answer, of course, to this question
J 3 that the proposal has nothing whatsoever to do with raising or lowering
ar
i-ffs. Tariffs are adjusted by Congress or by trade agreements in this
^untry.
With a view to presenting a simplified picture of the main
f
Junctions performed by a fund of this kind, I am setting forth a few of
main features of such a fund .and leaving the details to those who
dre
expert in this particular field.
When the war ends, Great Britain, Germany, Russia and other
-Quntries will try to reconvert their wartime industries to the commerce
° Peace as rapidly as possible. They will need foodstuffs and industrial
materials (cotton, oil, metals, etc.) as well as machinery and other
uinge for which they will not be able to pay by exporting their own
Jl?0c*s arid services because their factories will not be equipped for peaceime production. Many of them will be short of gold with which to make
Payment and they may not find it feasible to arrange private credits in
financial centers. Some of the most acute situations will have to be
®t by direct relief measures and a United Nations organisation is in the
maklrig to handle this big .job. In other cases which are not so severe,
the
problem will be to extend credit to bridge over the period until the
countries concerned can pay their own way again by exporting to the rest
the world. It is to be hoped that such credits can be arranged mostly
n a
long-term basis, since it will take many of the devastated countries
FEB
1944
Y
7
-2•jome time to develop production to the point where they can start repayment by exporting more than they import. Such long-term credits will have
n
f ^ o t i a t e d o n a specific basis with countries like the United States,
^nich will have a surplus of goods and services, although it may be possible
° work out a plan whereby the various creditor countries can coordinate
1
teir lending activities through some international institution. Finally,
oivever, it would seem desirable to let foreign countries have a "cushion"
short-term credit with which they could operate during the transitional
Period. This is one of the initial purposes of the fund, arid one which
an be served only by having some sort of 'fund set up as scon as the war
For example, if England wanted to buy cotton and there were
p i l a r s available in the market because they had all been used in the
g r°hase of other American products, she would give the fund English pounds
J f i n g equal to, the number of American dollars needed to pay for the
tton. The rate of exchange would be fixed within relatively narrow
be
The English manufacturers would weave the cotton into goods to
Sol
^>
let
us say, to America for dollars and to Brazil for cruzeiros.
Th
?
dollars
could
then be returned to the fund and the English would reCe
^ l v e their pounds back. The United States might want to buy some coffee
m
frazil so we would trade American dollars to England for Brazilian
Cr°
which the English received from Brazil in payment for cotton
Sold b
tQ
y England to Brazil. We would then use the Brazilian cruzeiros
t h e C0I ee
se+^k^
^ ' The rate of exchange in each case would be the rate
th >
fund* The English would again receive their pounds back and
j4 e fund, as far as England is concerned, would be in relative balance.
' i s important t
o understand that the fund would not in any way interfere
f
j
ordinary
exchange
transactions in the market. It would only handle
s
^ \r u n c l e a r e c i transactions as might develop after all dealings in the
pQ, 13t will have been effected. It will enter into the picture at the
u s e d t o erlter i n
inL?h W h e r e
the gold standard days. If the conditions
the world are favorable to agriculture, commerce and industry, and if
in
. a r e w i l l i n & to trade with each other without being too nationalistic
to ?
viewpoint, the fund will balance over a period of years and prove
be
a simple and effective device for facilitating trade.
pe
In this country we are vitally interested in seeing that
ho°t--e. r ? t u r n t o t h e i r peacetime pursuits as quickly as possible after
°t:i.Lities cease. World
still
chaotic, and
to.
mux.'.u iconditions
- u x i u j l w j . jwill
.4. a
oxj.j.. be
ufc! uu?.tobJ.c,
m u if
xi mass
unrest and starvation were long continued, conditions would
<W"ln t>e r i P e l o r a involution — and revolutions bring dictators. If
t 0 0 c r acy is to thrive as the future type of government, it will have
a
Readily rising standard of livingi The four freedoms
u
have to be visible to all.
0
When making loans from the fund to the war-torn countries in
0
. Q e r to permit them to purchase raw materials and equipment, short-term
for. + skould he given — and of course it would be necessary, not only
' the safety of the fund itself but for the well-being of the borrower,
-3o see that the volume of such loans is in keeping with the commerce of
v . country involved. Long-term loans for capital investments, such as
gilding airways and factories and developing water power, should be outJ e the field covered by the machinery of the fund. The effect of such
" o a n f on the future ability of the country- to pay or of our country to
sid!iVe rjayrnenty i n
and services ivould have to be carefully con^aered. Maybe American investors will become more internationally minded
& U m e goes on, but the point I want to emphasize is that we should not
x long-term financing with the short-time commercial operations of the
th
^ w o u l d b e i'o^-iy to repeat the error of the ' 20r s and loan money
at could not be repaid, and yet we must take a modest risk in order to
"hieve an over-all good.
You may well ask the question, "How vri.ll England sell enough
P a y back the amount of money she takes from the
at
the beginning?" We might just as well face the fact now that
Peo i
° r m y o t h e r c o u n try for that matter, cannot pay us unless the
in
for
America are prepared to accept goods and services in return
material and
for v
equipment we sell. This would hold equally true
fi I t h e o t b e r members of the fund. There was a time prior to the
was
tic i V / o r lude Ws at ir o wn hbeenc a
unnecessary to give much thought to this par°f th
?
use the United States was in debt to the countries
fell
° l d w c r L d a n d d °y l)Y d a 7 the interest and amortization payments
d U e i n Altlorican
and
dollars and were accumulated by the British', French
&Ut ° t h e r P e o P l e 3 * These dollars v:ere used to purchase our cotton, wheat,
and0m.0.biles a n d other products. However, conditions have changed. British
We
foreign investments in this country have been largely liquidated.
now out of debt
in/i?
to foreign countries and, instead, they' are heavily
Qeb
ted to us.
Ro
fund
and servicos to
a.ro
Assuming we want to continue in the export business, there
" lQ ur courses of action to follow:
bet„ 4
First, we could accept gold in payment for the difference
sell. At the present time we have more
w e n o e d f o r comrr
&o]h ,
^rcial uses and backing for our currency. More
inJ ' v o u l d b e quite useless unless we were prepared to use it in purchas° &°ods and services from the rest of the world.
w h a t w e b u y 0Iid w h a t w e
ViCo
Second, we could give away our surplus commodities and serof the world, considering such a move a WPA project to
thro W ° r k ancl emPlo:/mont in this country. But this would be philan^lH P y f ~~. n o t t r a d e """ a n d the question would naturally be raised, "Why
hoUs
^ i t b e bettor to use the surplus material and labor to build
03
PoQt)1 ? r something that would increase the standard of living for the
^ this country?" Uving standards can be improved in all counand
ty
they must be improved if trade .is to flourish. Business people
W d " ° r i C a c a n n o t trade in a worthwhile way with bankrupt people in other
0 the
resfc
-u-
The third course of action would be to make long-term loans.
loans would furnish countries with money to parchase materials they
^°uld not otherwise pay for. Long-term loans would simply postpone the
d
y of settlement to some future time when we might be willing to accept
Payment in goods and services.
ese
Our fourth course of action, which is the one we must adopt
* a mechanism of this kind is to become really useful, would be to pur{u
sufficient goods and services from abroad to pay for what we sell,
transactions of this kind are not quite as complicated as one might
elieve. Suppose England buys some cotton, wheat, pork, machinery and
^ornobiles from this country — it does not necessarily follow that we
Ust purchase directly from England in order to secure payment. We might
Uy coffee from Brazil and rubber from the Orient, and the money Brazil
the Orient, for instance, owe to Great Britain for goods and services
Purchased could be used by Great Britain to pay for its purchases from
^through the fund at relatively constant rates of exchange. One of the
gamine aids to business would be the relative stability of exchange rates,
v^ e P^ a n s could be made with greater safety if these exchange rates
re
not subject to speculative changes from time to time.
^
The main point to keep in mind is that if we are going to
.^port in a business-like way, it will be necessary to import, and if we
Port as much as we export, a fund can furnish the machinery to make the
Peration efficient and. economical. But if we are unprepared to accept
Ports in a volume equivalent to our exports, we night just as well face
the
Si o a n ( i
because no fund of this kind could operate
ccessfully over a period of time unless v/e follow the fourth course of
nco 10n o u t l i n e d a b o v e - i'n order to accomplish this result, it is not
f
^S3ary to import products that would create such competition as to ruin
Trading in many articles and services (in such a way
t h ^ican industry.
^ ^t American agriculture and industry would not be injured) with other
Entries would help to increase employment and raise our standard of
Foreign trade is very similar to business between individuals,
down town
c0
and buy a suit of clothes or some groceries from the
rher store, you ordinarily use money to pay for them. You earned the
by selling your own goods or services to someone else. As long as
Ci
° ^ a t , y° u a r e all right and the economy is all right, but if you
foi^ your job or your crops ax^e a failure and you do not have money to pay
the things you want, someone will have to give the money to you or you
act - ^ a v e
borrow.. If the money is given to you, that closes the transyo l 0 n j
^ y° u borrow to pay for these things you will have to sell
cro s
arid
P or services sometime in the future to pay off the loan —
So
it is between nations.
*
The currency stabilization fund, by itself, is merely machinery
the smooth operation of international trade. True, it has certain
at? G r v i s o r y f l i n c t i o n s ' One function is to keep exchange rates from fluctun
S too widely in order to prevent the retarding of commerce. You know
-5u
it i s in
your own business — when prices fluctuate wildly, you canoperate efficiently or economically. Stabilization of exchanges
nin
relatively narrow limits helps to promote trade.
p;i . .
The basic fact we must face at this time is not so much the
Jl r k i n d
the ?i ?
° f s t a b : l l i z a t i o n f u n d we are going to set up but rather
mportant
the
Question of whether our nation and the other nations of
culfV/°rld a r e g o i n g t o c r e a t e a n atmosphere and condition in which agrip e a i n d u s t r y a n d commerce can thrive. If we do this, we will have
??d Prosperity for generations to come. If not, we might just as
inht^f C)Ur gwis and keep our ammunition dry. If, after the war, the
good + t S ° f c o u n t r i e s participating in the fund are enabled to have a
* standard of living, then they will be in a frame of mind to retain
a
agri °? f u l a n d dQmocratic ^ P e of government. If, on the other hand,
^ -yculture, industry and commerce are throttled and retarded by unwise
thes00?1 p o l i c i e s a n d t h e selfish interests of individuals and countries,
fund a v o r a b l e conditions will not exist and an economic stabilization
to 1 f'?uLd b e J u s t o n e m °re piece of useless machinery that started out
ieve a ver
W
/ desirable result but could not accomplish that purpose
~^use conditions were against it.
p rod
American agriculture and industry cannot maintain maximum
UrD'l X ° n u n l e s s a reasonable percentage of their products are exported,
nati
. ° f f a m P r o d u c t s arid surpluses of labor will hold down our
nCOm
inc0°
°* J u s t 3 t o p a n d t h i n k -for a moment about the national
m
f Uie postwar
have + °
Period. We vail have to service our debt. We will
of G,
^intain a large Army and Navy. We will have to pay the expenses
v e n d e d social services that have been created and have proved their
liv• 1' A 1 1 of this can be done and we can have a far better standard of
Aftieri t h a n w e h a v e e v e r enjoyed if we do sufficient business to keep cur
v/q 7\can economy operating in high gear. You hear some people say, "Well,
iiVG within
^em
ourselves and if others want to buy our products, let
ne a n d
th
Unem ?°
®m. n They might more accurately say, "Let us have
W o e J?,ymGnt a n d a l o w s t a n d a r d of living." But no one would publicly
thu i ,t h e latter, though too often we unwittingly do things that have
° bad result.
s
imPovi,
cut
1
have purposely omitted consideration of the necessary and
tails that will have to be worked out in order
a stabilization fund
into successful operation. I believe our
ahic n m e n t should lay down certain general guides and leave to some cap^
agency the working out of the plan. Congress should demand a full
in
report each year so it can alter the course as it deems best
ae interests of our country.
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