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COMMITTEE PRINT

THE INTERNATIONAL
MONETARY CRISIS
COMMITTEE ON FINANCE
UNITED STATES SENATE
RUSSELL

B. LONG, Chairman

BRIEFING MATERIAL PREPARED BY THE
STAFF FOR THE USE
OF THE
SUBCOMMITTEE ON INTERNATIONAL
FINANCE AND RESOURCES
HARRY F. BYRD, JR., Chairman

MAY 1973

U.S. GOVERNMENT PRINTING OFFICE
96-6780

WASHINGTON : 1978

For sale by the Superintendent of Documents
U.S. Government Printing Office, Washington, D.C. 20402
Price 40 cents domestic postpaid or 25 cents GPO Bookstore
Stock Number 9270-01828

COMMITTEE ON FINANCE
RUSSELL B. LONG, Louisiana, Chairman
HERMAN E. TALMADGE, Georgia
WALLACE F. B E N N E T T , Utah
VANCE HARTKE, Indiana
CARL T. CURTIS, Nebraska
J. W. FULBRIGHT, Arkansas
PAUL J. FANNIN, Arizona
ABRAHAM RIBICOFF, Connecticut
CLIFFORD P. HANSEN, Wyoming
HARRY F. B Y R D , JR., Virginia
ROBERT DOLE, Kansas
GAYLORD NELSON, Wisconsin
BOB PACKWOOD, Oregon
WALTER F. MONDALE, Minnesota
WILLIAM V. ROTH, JR., Delaware
MIKE GRAVEL, Alaska
LLOYD BENTSEN, Texas
TOM VAIL, Chief Counsel
MICHAEL STERN, Assistant Chief Clerk

SUBCOMMITTEE ON INTERNATIONAL FINANCE AND RESOURCES
H A R R Y F. B Y R D , JR., Virginia, Chairman
VANCE HARTKE, Indiana
ROBERT DOLE, Kansas
MIKE GRAVEL, Alaska
WILLIAM V. ROTH, JR., Delaware
ROBERT A. BEST, Professional Staff

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CONTENTS
Page

I. Introduction
I I . U.S. balance-of-payments deficits
I I I . Oil and the monetary crisis
Projected state monetary reserves of the four major producing states of
the Arabian peninsula (table)
Estimated production and revenue, 1975 and 1980 (table)
IV. The lessons of history
V. T h e post-war monetary system
V I . Reform of the International Monetary System
Appendix A.—'Does Monetary History Repeat Itself—Address of Wm. McC.
Martin, J r
Appendix B.—Statistical material:
Tables:
1. U.S. balance of payments, 1946-72
2. U . S . reserve assets, 1946-72
3. U.S. liquid and other liabilities to foreign official institutions, and
liquid liabilities to all other foreigners
4. Gold production
5. London gold price at P.M. fixing, J a n u a r y - M a y , 1973, biweekly. .
6. Approximate private gold sales in all international markets
7. Comparison of Federal budget estimates originally submitted to
Congress and final results under the Kennedy, Johnson, and
Nixon administrations—with percent changes in price indexes. .
8. Consumer price indexes in the United States and other major
industrial countries, 1957-72
9. Percent appreciation (plus) or depreciation (minus) against the
dollar
10. Weighted average appreciation against the dollar
11. Global balance of trade and payments of the European Community
and J a p a n , 1972
Appendix C.—The Secretary's statement

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1
2
5
6
7
8
12
13
17
28
32
33
36
38
39
40
42
43
44
45
49

THE INTERNATIONAL MONETARY CRISIS
I. Introduction
Speculation against the dollar has risen to a fever pitch. The price of gold
on the Paris Bourse hit $126 an ounce on May 15 and $111 in London on
May 16. Currency speculation and the rush to gold may be irrational, but
it is having a severe effect on the U.S. stock market and on the balance of
payments. Between January 2, 1973 and May 25, the U.S. stock market
dropped over 100 points. The bear market cannot be explained by the
performance of the U.S. economy which was growing at the extraordinary
rate of 14.3 percent in the first quarter. The degree to which market confidence is dependent upon a strong U.S. international position is reflected in
the 29 point increase in the Dow-Jones industrial average on May 24 when
the U.S. announced a significant improvement in its trade performance
which, apparently over shadowed the news that several large banks increased
their prime lending rates.
Mainly as a result of speculation against the dollar in January and
February, the U.S. balance of payments deficit in the first quarter of 1973
reached the phenomenal height of $10.2 billion. As those figures were
published, a new round of speculation against the dollar ensued which will
undoubtedly make the second quarter's balance of payments look bad.
There appears to be a broad loss of confidence in the dollar and a rush to
gold. The panic buying of gold may be viewed either as an irrational act
which should be left alone, or as an attack against the American dollar
which should be fought.
In response to the question: "Is there anything that the United States
should or could do at the present time to calm the situation in the currency
markets?", Under Secretary of the Treasury Paul Volcker recently stated:
"The most fundamental thing we can do and the only thing really effective
in the long run, is to deal with this inflationary problem at home and to deal
with the balance of payments problem. I think we're working as hard as we
can on those problems. . . . There is no financial legerdemain that I know
of or sleight of hand that solves this problem unless we are dealing with those
fundamentals."
Foreign holders of dollars as well as Ameicans are looking for tangible
signs that the United States will get a grip on itself and "put its financial
house in order." Under these circumstances, it would appear that the benign
neglect philosophy in a crisis situation is more risky than a positive action
program to fight the speculation.
The United States is not a helpless giant: there are measures we could
take unilaterally and in concert with our allies to shore up the confidence

(1)

2
in the American dollar which has been severely eroded by two devaluations in 18 months, a continuing large balance of payments deficit and
attacks against the American dollar from certain countries and sources.
Thus, some of the key issues which this hearing should illuminate are:
(i) Can the United States afford to stand still and permit the gold price
to hit ridiculously high levels, even if the speculation is irrational?
(2) If so, are we not going to witness a "double mirror effect" on our
balance of payments—one large balance of payments deficit caused mainly by
speculation will lead to a chain reaction causing other large balance of payments
deficits!
(3) What are the alternatives?
(a) gold sales by the U.S.?
(b) a monetary conference?
(c) fund excess dollars by issuing long-term attractively priced securities?
(d) a special issue of IMF Special Drawing Rights?
(4) How long will it take before the two dollar devaluations bring about
a significant improvement in the basic U.S. balance of payments deficit? Can
we afford to wait?
(5) Where is the speculation against the dollar coming from—oil producing
countries, banks, multinational corporations? Is there sufficient information on
this?
(6) What will be the effect of growing dependence by western countries on
Middle East oil as far as the international monetary system is concerned?
(7) What progress is being made in the lono-term reform of the monetary
system?
n . U.S. Balance of Payments Deficits
Unquestionably, fundamental reforms in the institutional arrangements
governing monetary and trade affairs between nations are urgently needed.
However, no reform will insure international monetary stability unless
the balance of payments deficits of the United States come to an end.
These deficits have lasted too long, have risen to extraordinary heights,
and have undermined confidence, not only in the dollar but also in paper
currencies generally.
The first order of business, it would appear, is for a positive program to
eliminate U.S. balance of payments deficits. Two devaluations of the dollar
in the past 18 months should, over a period of time, significantly improve the
balance of payments position. Undoubtedly, the devaluations will increase
the price of imports, help make American exports more competitive, attract
foreign investment to the United States and make it more expensive to invest abroad. However, it also will increase the cost of imports which are considered inelastic, such as oil, and increase the cost of maintaining military
bases and supporting operations in foreign countries. No one can say with
any assurance that the two devaluations will restore equilibrium to the U.S.
balance of payments and, if so, in what time frame? Given the present specu

3
lative fever, can the United States afford to wait until the devaluations have
hopefully brought about the kinds of adjustment that are necessary? This is
a crucial question.
There is no "scientific way" of assessing a "true value" of any currency;
indeed the "true value" will change regularly, which is why some flexibility
in exchange rates is needed. Psychology as well as underlying economic
realities play a role in setting exchange rates, just as they do in setting stock
prices. But can the currency of the largest country of the Western world,
which also still serves as the world's reserve currency, be buffeted back and
forth by speculators, without creating severe strains on the world's monetary
and trading structure?
The dollar still serves as the world's reserve currency. That role will
diminish over time through agreement, and if the United States eliminates
its balance of payments deficits. The deficits have created international
reserves for others. For the U.S. they are reflected in an increase in liquid
liabilities to foreigners. At the end of February, 1973, liquid liabilities to all
foreigners totaled $87.9 billion; liquid liabilities to foreign official agencies
(mainly central banks) were $68.5 billion. Against this, the United States
had reserve assets of only $12.9 billion, the gold portion of which $10.5
billion has been nonconvertible since August of 1971. (See tables 1, 2, and
3 in appendix B.)
Our liabilities to foreign official institutions constitute a significant portion
of their reserve assets. I h e European Community held $57.3 billion in
international reserves (including gold, Special Drawing Rights, reserve
positions in IMF, and foreign exchange), while Japan had $16.5 billion.
U.S. liquid and other liabilities to Western European official institutions
totaled $40.8 billion in February and $17.9 billion to official institutions in
Asia.
It is an inherently unstable situation to have a major portion of the
world's international reserves held in a currency which is unstable, and not
convertible. This is now the position of the United States dollar.
By history and circumstance, the dollar has been the world's currency,
and that makes the United States, in effect, the world's banker. But when
the creditors of a bank begin to lose confidence, they withdraw their
deposits. Demand deposits of foreigners in U.S. banks have declined from
$20.5 billion in 1965 to $7.8 billion in February, 1973. Foreigners have
chosen to hold Treasury bills and have, in effect, financed about $31 billion
of the Federal budget and balance of payments deficits since 1969 by bill
purchases.
The question has arisen whether it would be useful to fund the shortterm liabilities of the United States into long term assets—either in the
form of attractively priced long-term security issues or special issues of the
International Monetary Fund's special drawing rights (SDR's), as a shortterm device to sop up excess liquidity abroad. Given the liquidity preference
of foreigners this may not be feasible without at least a gold content
guarantee. Is it worth it?

4
Another measure which should be considered seriously is gold sales by the
United States in short, quick bursts to fight the speculation against the
dollar which may be as much politically motivated as it is economic. The
speculators could be burned if the United States either alone, or in concert with other countries, intervened actively in the gold and foreign exchange markets to smash speculation whenever it got out of hand. Up
until now, profits have been a fairly sure bet for speculators. It was clear
that the deutschemark and the yen would be appreciated and the dollar
devalued with the last round of speculation. Only by making speculation
a losable proposition can governments effectively deal with it. Among
other things flexible exchange rates are needed to increase the risk of loss
in speculation.
Beating back the speculators is one thing. Ending the chronic balance
of payments deficits is another. For longer term stability we need an
equilibrium in our balance of payments problem. But after 20 years of
deficits, equilibrium is obviously an elusive phenomenon. The devaluations
should help, but we still have to examine our trade account in detail to
determine where we are losing competitiveness, what might be done about
it, and how to meet import competition on a sector-by-sector basis. Industry, government and labor will have to come together to develop an
industrial strategy to meet foreign competition. It may not be a question
of more subsidies but more effort and coordination. There are markets
out there! And the two devaluations, the DISC legislation and the investment tax credit are aimed at making U.S. industries competitive in
world markets.
All the other accounts will have to be examined in detail, including the
government accounts. It seems ludicrous that surplus countries should not
pay their fair share of the foreign exchange costs of NATO or other security
arrangements. Our aid programs also appear in need of a thorough overhaul. The catch-all euphemism of "less developed countries" is not only
denigrating but inaccurate.
Some "less developed countries" like Brazil, Mexico, South Korea,
Taiwan, and Hong Kong have had phenomenal growth records. And, the
international reserves of "less developed countries" increased from $10.9
billion in 1960 to $35.8 billion in September, 1972, presently accounting for
24 percent of the world's reserve assets compared with 18 percent in 1960.
The United States had basic balance of payments deficits with less developed
countries of over $2 billion in each of the years 1971 and 1972, with government to government aid programs the largest contributor. The U.S. had a
trade deficit with "less developed countries" of $0.9 billion in 1972, which
would be much larger if aid-financed exports were excluded. This is not
to suggest "less developed countries" are undeserving of aid, but that the
catchall description may be inappropriate for policy guidance.

5
III. Oil and the Monetary Crisis
Some "less developed countries" have enormous raw material resources
which will earn for them billions of dollars of foreign exchange reserves
over the next decade. Several Arab oil producing countries will earn more
money than they can usefully employ for their own development. These
countries will certainly have the potential for moving billions of dollars
from one money market to another for economic or political reasons.
It has been reported that Arab governments did not speculate against the
dollar last January and February but took a $300 million loss on their dollar
holdings, while certain rich Arab individuals, who in some cases are reputed
to have more money than their governments, might have made windfall
profits. But however reliable the source, this is sheer hearsay. Beyond doubt
is the fact that oil producing states, and wealthy individuals within those
states, have a vast potential for speculation. By the end of the year four
major oil producing states in the Arabian peninsula—Saudi Arabia,
Kuwait, the Union of Arab Emirates and Quatar—will have accumulated
reserves—mainly dollars—of about $9 billion. It is estimated that by the
1980's the figure could surpass $100 billion.
White House energy specialist James E. Akins estimated in a recent
issue of Foreign Affairs the cumulative income of the Arab OPEC countries
from 1973 through 1980 at over $210 billion. Assuming a 20 percent
compounded growth in their expenditures for the same period, Arab
budgetary expenditures would total less than $100 billion, leaving a balance
of unspent reserves of over $100 billion by 1980. "What will be done with
this money will be a matter of crucial importance to the world." writes
Akins. "The first place for its use must certainly be in their own countries;
the second must be the Arab world, which will not, as a whole, be capitalrich." 1 The fact is, no one really knows how they will spend their money,
or whether they will have so much they will stop or slow down oil production from time to time. In a recent meeting in Kuwait it was suggested
that Arabs float their riches from country to country, depending on how
each country reacts to Arab problems.
The budgets of many of these states will be in substantial surplus because
of the energy needs of the western consuming nations and the rising price
of oil. For example, this year the Saudis are unlikely to be able to spend
more than 60 percent of their $3.2 billion budget. By 1980, the Saudi
monetary reserve position is estimated to be close to $50 billion. The same
basic situation exists with respect to Kuwait, Ahu Dhabi and Quatar.
The following table presents a range of estimates on projected monetary
reserves. They might be conservative as the higher figure represents maximum projected production levels at a price tag (tax plus royalties) of
$3.50 a barrel, which may well be too low.
1

James E. Akins, "The Oil Crisis: This Time The Wolf Is Here" Foreign Affairs, April, 1973, p. 481.

!>5-678 O—73

6
PROJECTED STATE MONETARY RESERVES OF THE FOUR MAJOR
PRODUCING STATES OF THE ARABIAN PENINSULA
Billions of dollars

Saudi Arabia
Kuwait
Abu Dhabi
Quatar
Totals

1973

1980

5.00
3.50
0.27
0.46
9.23

30.0-75.0+
7.0-10.0+
5.0- 8.0+
2.0- 2.5+
44.0-95.5

The lower figure for 1980 represents the minimum projected production levels
sold at the price scales laid down by the 1971 Teheran agreement. The higher
figure represents the maximum projected production levels at a price tag (tax
plus royalties) of $3.50 a barrel.

Mr. Akins' estimates of oil production and revenues in a large group of
Middle East and North African countries are shown on the next page for
1975 and 1980. These data are based on taxes and royalties in effect prior to
the dollar devaluation in February, 1973. If the 1972 Geneva agreements on
currency revaluation apply, the income figures should be increased by 8.5
percent. The revenue figures are annual and do not represent the cumulative income, which, as stated, Mr. Akins estimates at $210 billion between
1973 and 1980.

7
ESTIMATED PRODUCTION AND REVENUE, 1975 AND 1980
[Stated in thousands of barrels per day; billions of dollars
annually]
Production

Middle East:
Iran
Saudi Arabia
Kuwait

Iraq

Abu Dhabi
Other Persian Gulf
Subtotal
North Africa:
Libya

Algeria

Subtotal

Total

Revenue

1975

1980

1975

1980

7,300
8,500
3,500

10,000
20,000
4,000

4.7
5.4
2.2

12.8
25.6
5.0

2,300
1,800

4,000
2,000

1.5
1.0

5.0
3.2

25,300

45,000

16.0

58.0

2,200

2,000

2.0

1.1

2.3

3,400

3,500

3.1

5.4

28,700

48,500

19/1

63^4

1,900

1,200

5,000

1,500

1.2

6.4

3.1

Source: James Akins, op. cit. pp. 479-480.

The Arab governments profess their interest in contributing to international monetary stability. A prominent Kuwaiti banker recently stated:
"It is not in our interests to have currency crises. We know we cannot live without the
test of the world. But we are not going to accept any monetary solution that is short
of partnership." 2

The Committee of Twenty, an IMF group established to work out the
reform of the international monetary system, has only one Arab member.
The Arab States feel they are under-represented.
2 The Economist, May 5,1973, p. 39.

8
A key figure in the world petroleum scene is Saudi Arabian Petroleum
Minister Sheikh Almad Zaki Yamani, one of his country's most influential
leaders. Sheikh Yamani has suggested that Saudi Arabia, by far the
world's largest oil reservoir, may be willing to increase production to 20
million barrels a day by 1980 (from 7.2 million today) but only if the United
States creates "the right political atmosphere." However, he has also stated
that Saudi Arabia is already getting more money from oil than its small
economy can absorb. "If we consider only local interests," he said, "then we
shouldrf't produce more, maybe even less." 3
Oil as a weapon
What it all adds up to is that there is a sellers market for oil and, at this
time in history, oil producing states are in a very strong bargaining position
with the West, whose dependency on Middle East oil is growing daily.
There have already been limited export boycotts. If the West is concerned
about the extent of Arab oil producing states with respect to how they will
use their money, it is understandable in the light of vitriolic anti-American
press which keeps talking about using "oil as a weapon" in the battle against
imperialism. Several Arab leaders have expressed their view. Kuwaiti
ruler Shaykh Sabah as-Salim as Sabah has declared that "his country will
use oil as an effective weapon in the battle when the zero hour comes." Cairo newspaper Al-Jumhuryah recently called for "using the huge Arab funds deposited
in European and U.S. banks as an effective weapon in the battle of the Arab destiny."
The use of these deposits, it said, "would be as effective as the oil weapon."
The United States has a number of policy dilemmas it must face up to
in this area, which are not a proper subject of this paper. But the key point
is that unless cooperative solutions are found reasonably soon with respect
to the reform of the international monetary system and to the Middle East
boiling pot, the United States and the Western world may not only find
themselves with an energy shortage, but with continuous monetary crises.
Before discussing the postwar evolution of the monetary system it appears
useful to review some of the lessons of history which are quite relevant to
the present situation.
IV. The Lessons of History
In the system as it has evolved, gold has become a pillar of stability and
faith in the dollar is on the wane. There are some voices who would have
us return to a gold standard. This is unfortunate as the "disciplines" of the
gold standard could never be appreciated by the workingman who must
undergo most of the disciplining. Historically, gold has been used as money,
either for trading purposes or as a reserve asset. The United States wants
to move away from gold as the core of the international monetary system
based on reserves and par values. But it is extremely difficult to convince
8

Washington Post, April 19,1973, p. 25.

9
creditors that another structure should be built based on managed currencies
or SDR's, when the "managers" are mismanaging.
Some foreign countries, such as France, are insisting that the United
States restore convertibility into gold before beginning serious trade negotiations. They perhaps do not appreciate that "disciplining" the United
States by gold purchases is unacceptable to the American people if it
means growing unemployment. There is no magic alchemy in gold. Under
the gold standard as it existed before 1914, countries in deficit were forced
to deflate, while surplus countries were not under the same compulsion to
inflate. It was a brutal way to achieve international balance.
Disquieting Similarities.—In a widely discussed commencement address at
Columbia University on June 1, 1965, The Honorable William McChesney
Martin, then Chairman of the Board of Governors of the Federal Reserve
System, spoke of "disquieting similarities" between today's monetary
crisis and those of the twenties and thirties. The entire speech is worth
rereading and is reprinted as Appendix A.
Viewing the twenties from today's vantage point, one can see that drastic
measures would have had to be taken to avert disaster. At the time, this was
not evident to anyone. In the buoyant twenties depressions were considered
a thing of the past. Speculation was rampant. Surplus countries (at that
time the United States was in surplus) did not allow the expansion of
income and prices but pursued a monetary restraint program and tariff
increases which caused gold to pour in. The payments surplus countries,
mainly the United States and France, tended to hoard gold and forced
severe adjustments on countries like England where unemployment ranged
from 10 to 17 percent throughout the twenties. In France, gold was largely
sterilized in the Central Bank, and in the United States credit expansion
was restrained by the Federal Reserve maintenance of a level of gold
reserves approximately twice the legal limit.
Today, the U.S. balance of payments crisis revolves around the growth
of short-term liabilities relative to U.S. gold reserves. The immediate
problem is how to get rid of the overhang of indebtedness. In the critical
early thirties, European central banks were holding, as today, large balances
of foreign exchange which had accumulated over a considerable period.
The total of short-term international indebtedness had reached about $10
billion by the end of 1930. But under the impact of the depression, sweeping
withdrawals of short-term credits put terrific pressure upon the central banks.
There was no IMF upon which central banks could fall back upon for
credit. Large holders of foreign exchange were converting their balances
into gold. Central banks sought emergency credits from the Bank for
International Settlements (BIS). Although its resources were insufficient,
certain credits were arranged with a gold-exchange guarantee.

10
1931 was a fateful year in the history of international finances. In May
of that year, the Austrian Credit-Anstalt collapsed. In June President
Hoover called for a one-year moratorium on intergovernmental debt
payments. In July an international conference was called which met in
London, but the acute financial crisis could not be stayed. In September,
1931, sterling fell and this led almost immediately to the suspension of
gold. By the end of 1931, sixteen countries had either abandoned gold or
introduced rigorous exchange controls. Foreign exchange was allocated
for the necessary imports of raw materials and import quotas were imposed
on specific goods. Countries made bilateral clearing arrangements to help
balance trade between two countries.
Private hoarding of gold became widespread. Central banks also intensified their hoardings. In the first six months of 1932, European central
banks converted $700 million of their dollar holdings into gold. The third
Annual Report of the BIS in 1933 said:
"Central banks should combat any conception that gold is properly employable as a store of wealth, or that its primary object is to assure internal
convertibility of notes so that all who will may hoard gold coin on demand,
to the detriment of the public good and the general economic welfare"

That statement would fit perfectly in an annual report of the International Monetary Fund for 1973.
Foreign exchange holdings declined drastically after the fall of sterling.
In 1929-30 aggregate official foreign exchange holdings amounted to
about $11 billion. By the end of 1932, they had dwindled to about $1
billion, while the aggregate gold stock was nearly $12 billion.
By the end of 1931, only eight countries were still on the gold standard,
ten were operating on a controlled flexible exchange rate basis and the
rest introduced exchange controls.
The United States abandoned gold in April, 1933, but under the Gold
Reserve Act of 1934, the dollar was again linked to gold and devalued.
In July, 1933, the "gold bloc" was formed with six countries—France,
Belgium, Holland, Italy, Poland and Switzerland—declaring firm adherence to the gold standard. The world was then fragmented into blocs. The
players were different then, but the effect was the same. Shortly thereafter,
the British Commonwealth countries issued a declaration calling for international action to reduce interest rates, undertake capital expenditures
and raise wholesale prices.
In July, 1933, the famous London Monetary and Economic Conference
was held with 64 countries represented. The Conference report contained
five resolutions calling for:
(1) Currency stabilization;
(2) Gold to be re-established as the means of exchange value;

11
(3) Economy of gold by keeping gold out of circulation and reducing
gold minimum ratios to 25 percent;
(4) Central banks collaboration, and
(5) International cooperation to stabilize cyclical fluctuations.
Should a monetary conference be held in 1973, one would expect points,
(1), (2), and (5) to be agreeable to the United States and most other
countries with an emphasis on a reduced role of gold, and paper currency
reserves and increased use of SDR's and IMF credit facilities. But the
London Conference did not end the crisis nor did it end the "blocism"
that had developed.
The gold bloc countries suffered gold losses intermittently beginning in
1933, and by 1936 they devalued. The French devaluation was welcomed
by the United States and the United Kingdom and both countries agreed
beforehand that they would take no countermeasures. The three countries
declared they would support the exchanges so as to forestall an,y speculative
short-term capital flows. The other countries joined this tripartite monetary
agreement and, six countries (France, the United States, United Kingdom,
Belgium, Holland and Switzerland) cooperated to support the new rate
structure. This close collaboration in monetary policy represents a highly
significant development, but not all the players joined.
Germany became the leading proponent of bilateral bargaining and
clearing agreements. The "Schachtian bilateral system," named after the
German Finance Minister Dr. H. Schacht was aimed at achieving balance.
However, it led to a most complicated system of exchange controls. Germany's economy however grew stronger while its neighbors, still laboring
under the discipline of the gold exchange standard, continued to stagnate in
depression.
Lessons from the Thirties.—During the thirties, countries were basically in
retreat. They were attempting to protect their gold holdings by various
restrictive devices. They were distrustful of foreign exchange, and attempted to get out from under their short-term liabilities. Surplus countries
protected their surpluses while deficit countries, fighting deficits and inflation, failed to inflate their economies through expansionary-measures.
The result as we all know was economic misery on a world-wide scale.
History should not repeat itself. There is a commitment to full employment and a knowledge of how to get the economies off dead center. The
more difficult problem appears to be controlling inflationary pressures in
advanced countries and achieving steady, even growth. The danger of
severe recession or depression appears remote for the United States, but less
remote for countries who depend more heavily on foreign trade in an environment in which currencies are gyrating. It was this latter concern which
motivated the founding fathers of Bretton Woods to opt for a fixed exchange
rate system.

12
V. The Post-War Monetary System
Fixed exchange rates provide certainty and stability so that international
traders and investors will know in advance just what a transaction will be
worth. However, there are serious disadvantages in such a system which
will be discussed.
Bretton Woods System.—The international monetary system which evolved
after the Bretton Woods Conference in 1944, was essentially a par value,
reserve oriented system, with the dollar playing a crucial role as the center
of the system. The main features of the system were:
(1) Fixed par values, adjustable only when absolutely necessary or
forced by speculation;
(2) The use of currencies, particularly the dollar as reserve assets,;
(3) Convertibility of official dollar holdings into gold.
Gold was the common denominator of all currencies, although they were
directly tied to the U.S. dollar.
There was a bias in the Bretton Woods system against letting the exchange
rates adjust in small but frequent quantities. Deficit countries were faced
with an inordinate degree of responsibility to eliminate deficits while surplus
countries were under no such compulsion. The United States dollar was so
central to the system that this country felt a moral obligation not to devalue
the dollar. Thus, we were put in the intolerable dilemma of having to correct a balance of payments deficit without devaluing the dollar or deflating
the economy, while maintaining a "leadership" position in world affairs.
Adjustment was a one-sided affair. Treasury Secretary Shultz said in his
September, 1972, IMF speech:
"Resistance of surplus countries to loss of their surpluses defeats the objective
of monetary order as surely as failure of deficit countries to attack the sources of
their deficits. Any effort to develop a balanced and equitable monetary system must
recognize that simple fact: effective and symmetrical incentives for adjustment are
essential to a lasting system.''*

The President's International Economic Report of March, 1973, pointed
out that:
"One of the ironies of the Bretton Woods system is that the exchange rigidities
which were built into the system to avoid the political and economic problems
encountered in the postwar period created political and economic problems of
their own."

Domestic deflationary policies for balance of payments reasons, and a loss of
competitiveness in industries in countries maintaining an overvalued currency, were among the serious economic and political problems resulting
from the biases of the Bretton Woods system.
New Economic Program.—The rules of the game under the Bretton Woods
system were changed when President Nixon announced his New Economic
Program on August 15, 1971.

13
The President's program had two interrelated objectives in mind: (1)
to correct the overvaluation of the dollar to reestablish the competitiveness
of U.S. products in world markets, and (2) to reform the international
monetary system to ease the continuing burdens on the United States and
to serve better the economic needs of the entire world.
In order to obtain these objectives, the President:
(t) Suspended the convertibility of the dollar into gold, special
drawing rights, or other reserve assets and allowed the dollar to "float"
in exchange markets;
(2) Imposed a 10 percent import surcharge on all dutiable imports;
(3) Excluded foreign capital equipment from the proposed tax
credit for investment;
(4) Proposed the Domestic International Sales Corporation (DISC)
to stimulate U.S. exports;
(5) Asked Congress to reduce foreign aid appropriations by 10
percent.
VI. Reform of the International Monetary System
Since August 15, 1971, we have had two official dollar devaluations,
currencies are still floating and dollar-gold convertibility remains
"suspended."
The world is now on a floating dollar standard. Currencies are still tied
to the dollar but in a more flexible way.
The key issue now is "where do we go from here"? At present there are no
internationally-agreed upon ground rules. The Group of Twenty experts
are trying to establish a new framework. Clearly we cannot return to the
Bretton Woods system. As a practical matter we probably could not maintain rigidly fixed exchange rates even if we wanted to, with all the speculative
capital crossing national frontiers. It has been estimated that multinational
corporations hold many billions of short-term dollar assets, as do foreign
branches of U.S. banks. The Arab oil producing countries, as noted, are also
large dollar holders and are capable of triggering off massive speculation.
In a very real sense the international monetary system (and the trading
system) is at a critical juncture. There are, as previously stated, no agreedupon rules governing the world's finances. There is no longer a dominating
central power keeping the system afloat. Confidence, that precious commodity that can only be achieved through proven performance, is lacking.
The performance of major countries in the system does not engender
confidence.
Restoring Confidence.—It would appear that the first priority for monetary
authorities is to act boldly and decisively to restore confidence in paper
currencies. An agreement by major countries to commit themselves to
eliminate entrenched deficits and surpluses may be called for. Cooperative
measures to intervene in the exchange markets and to fight gold speculators
may also be helpful. Controlling and attacking the underlying causes of
95-678 O—73

14
domestic inflation is obviously of paramount importance in restoring
confidence in a nation's ability to discipline itself. In that respect, the
United States seems to be going downhill in 1973 as the wholesale price
index in the first quarter increased by the phenomenal annual rate of
21.1 percent!
Governments must also commit themselves to long-term reform of the
international monetary system. More flexibility in the exchange rates
between currencies and a gradual increase in the role of Special Drawing
Rights are key ingredients as well as reformed trading rules to assist in
the balance of payments adjustment process are needed. Surplus countries
must surely recognize that persistent surpluses will certainly contribute to
a collapse of the monetary system as will persistent deficits. It is in their
self interest to avoid this by unilateral liberalization of imports if necessary.
A trade negotiation cannot be divorced from the goals of the monetary
system.
If the United States succeeds in eliminating its chronic balance of payments deficits confidence in the dollar will improve as will the prospect
for lasting reform in the monetary system. In the meantime, however, some
funding of short-term U.S. liquid liabilities may be in order.
There is a general consensus among private experts on the broad outlines
of international monetary reform. The impasse appears to exist at the
government level. The U.S. has made a proposal (See Appendix C).
Europe however appears to be concentrating on its own "monetary union"
and Japan on trade and investment issues. There is a possibility that all
major economic issues—trade, investment and monetary—may be combined in a major negotiation. Such a negotiation may prove unwieldy at
best unless the three major world centers—the U.S., the European Community, and Japan agree beforehand on general principles.
Principles of a New International Monetary Order: The Economists

View.—

Private experts from these countries met in Washington to consider longrange issues. The report 4 suggested the following guidelines:
A reconstruction of the system should provide for adjustments in par values in
smaller and more frequent steps and in accordance with agreed rules. These rules,
whatever form they take, should bear equally on surplus countries in upvaluing their
currency and on deficit countries in devaluing theirs. The rules should be framed so as
to make clear beyond all doubt that the level of employment—that is, the number of
jobs available—must be governed by domestic economic policy and not by the manipulation of exchange rates.
The reconstructed system would provide for a resumption of convertibility of the
dollar and would deal with the problem of the existing overhang of dollars. If this
were not done, there could be no guarantee that exchange rate adjustments could take
place in small steps. Par values would be established in terms of IMF units, no
matter how convertibility of the dollar and other currencies was assured.
* Reshaping the International Economic Order: A tripartite Report by twelve economists
from North America, the European Community and Japan, Washington, The Brookings Institution, 1972.

15
Provision should be made for the funding of the existing holdings of reserve currencies, including sterling. There are several ways in which this could be done, all of
them involving exchange for claims against the IMF or reserve positions with the Fund.
There might, for example, be afresh issue of SDRs to the depositors of reserve currencies with the Fund. Another method would be an exchange into deposit liabilities
with the Fund. Under this arrangement, the deposits of dollars by the monetary authorities would create deposit liabilities of the Fund expressed in IMF units. The Fund
would exchange the received liquid dollars into long-term obligations of the United
States, also expressed in Fund units. The deposits with the Fund would carry interest
at a rate similar to that provided for the SDRs {which, however, might be increased
above the present 1.5 percent a year), and the U.S. obligations held by the Fund would
carry interest close to the current market rate.
One further question to be decided is whether conversion should be voluntary or
mandatory. It may be preferable to remove the dollars with one clean sweep; on the
other hand, freedom of choice is not a bad principle if it can be upheld without danger.
But any dollars from existing official balances that are not funded when the opportunity is offered may have to remain inconvertible and without exchange-value guarantee.
For the appropriate degree of flexibility of exchange rates, a variety of techniques
may be used. The main principle is that exchange rates are matters of international
concern, and that such concern may relate not only to proposed changes in par values
but also to failures of countries to make adjustments when they may be internationally
helpful. This implies that the initiative for adjustments of par values may sometimes
have to come from trading partners and from international organizations and that
there should be a presumption of slow and orderly change rather than of prolonged
rigidity.

APPENDIX A

DOES MONETARY HISTORY REPEAT ITSELF?
Address of Wm. McC. Martin, Jr.,
Chairman, Board of Governors of the Federal Reserve System,
Before the
Commencement Day Luncheon
of the Alumni Federation of Columbia University

J u n e 1, 1965

(17)

DOES MONETARY HISTORY REPEAT ITSELF?
Address of Wm. McC. Martin, Jr., Chairman, Board of Governors
of the Federal Reserve System
When economic prospects are at their brightest, the dangers of complacency and recklessness are greatest. As our prosperity proceeds on its
record-breaking path, it behooves every one of us to scan the horizon of
our national and international economy for danger signals so as to be
ready for any storm.
Some eminent observers have recently compared the present with the
period preceding the breakdown of the interwar economy, and have
warned us of the threats of another Great Depression. We should take
these warnings seriously enough to inquire into their merits and to try to
profit in the future from the lessons of the past.
And indeed, we find disquieting similarities between our present prosperity and the fabulous twenties.
Then, as now, there had been virtually uninterrupted progress for
seven years. And if we disregard some relatively short though severe
fluctuations, expansion had been underway for more than a generation—
the two longest stretches of that kind since the advent of the industrial
age; and each period had been distorted in its passage by an inflationary
war and postwar boom.
Then, as now, prosperity had been concentrated in the fully developed
countries, and within most of these countries, in the industrialized sectors
of the economy.
Then, as now, there was a large increase in private domestic debt; in
fact, the expansion in consumer debt arising out of both residential
mortgages and installment purchases has recently been much faster than
in the twenties.
Then, as now, the supply of money and bank credit and the turnover
of demand deposits had been continuously growing; and while in the late
twenties this growth had occurred with little overall change in gold reserves, this time monetary expansion has been superimposed upon a dwindling gold reserve.
Then, as now, the Federal Reserve had been accused of lack of flexibility
in its monetary policy: of insufficient ease in times of economic weakness
and of insufficient firmness in times of economic strength.
Then, as now, the world had recovered from the wartime disruption
of international trade and finance, and convertibility of the major world
currencies at fixed par values had been restored for a number of years.

(19)

20
Then, as now, international indebtedness had risen as fast as domestic
debt; recently, in fact, American bank credits to foreigners and foreign
holdings of short-term dollar assets have increased faster than in the closing
years of the earlier period.
Then, as now, the payments position of the main reserve center—Britain
then and the United States now—was uneasy, to say the least; but again,
our recent cumulative payments deficits have far exceeded Britain's deficits
of the late twenties.
Then, as now, some countries had large and persistent payments surpluses
and used their net receipts to increase their short-term reserves rather than
to invest in foreign countries.
Then, as now, the most important surplus country, France, had just
decided to convert its official holdings of foreign exchange into gold, regardless of the effects of its actions on international liquidity.
Then, as now, there were serious doubts about the appropriate levels of
some existing exchange rate relationships, leading periodically to speculative movements of volatile short-term funds.
And most importantly, then as now, many government officials, scholars,
and businessmen were convinced that a new economic era had opened, an
era in which business fluctuations had become a thing of the past, in which
poverty was about to be abolished, and in which perennial economic progress and expansion were assured.
If some of these likenesses seem menacing, we may take comfort in important differences between the present and the interwar situation.
The distribution of our national income now shows less disparity than in
the earlier period; in particular, personal incomes, and especially wages and
salaries, have kept pace with corporate profits, and this has reduced the
danger of investment expanding in excess of consumption needs.
Perhaps related to that better balance, the increase in stock market
credit now has been much smaller.
Instead of a gradual decline in wholesale prices and stability in consumer
prices, there has now been stability in wholesale prices though consumer
prices have been creeping up.
The worst defects in the structure of commercial and investment banking
and of business seem to have been corrected—although we are time and
again reminded of our failure to eliminate all abuses.
The potentialities of monetary and fiscal policies are, we hope, better
understood—although the rise in government expenditures even in times of
advancing prosperity threatens to make it difficult to be still more expansionary should a serious decline in private business activity require it.
In spite of the rise in the international flow of public and private credit
and investment, business abroad appears in general to be less dependent
upon American funds. The recent restraint on the outflow of U.S. capital
has had little effect on business activity abroad, in contrast to the paralyzing effect of the cessation of U.S. capital outflows in the late twenties.

21
While the cold war makes for sources of friction absent in the twenties,
we are no longer suffering from the cancer of reparations and war debts.
We have learned the lessons taught by the failure of trade and exchange
restrictions, and of beggar-my-neighbor policies in general, although the
temptation to backslide is ever present.
We have become aware of our responsibility for helping those less developed countries that seem willing and able to develop their economies—
although the poor countries still are not becoming rich as fast as the rich
countries are becoming richer.
The International Monetary Fund has proved to be a valuable aid to a
better working of the international payments system.
A network of international, regional, and bilateral institutions and arrangements has reduced the danger of lack of international financial
communication.
And finally, the experience of the twenties has strengthened the resolution of all responsible leaders, businessmen and statesmen alike, never again
to permit a repetition of the disasters of the Great Depression.
But while the spirit is willing, the flesh, in the form of concrete policies,
has remained weak. With the best intentions, some experts seem resolved
to ignore the lessons of the past.
Economic and political scientists still argue about the factors that converted a stock-exchange crash into the worst depression in our history. But
on one point they are agreed: the disastrous impact of the destruction of the
international payments system that followed the British decision to devalue
sterling in September 1931. At that time, sterling was the kingpin of the
world payments system, exactly as the dollar is today. While changes in the
par values of other peripheral currencies affected mainly or solely the
devaluing countries themselves, the fate of sterling shook the entire world.
This is not wisdom of hindsight. Only a few weeks before the fateful
decision was taken, the most eminent economist of the day stated that "for
a country in the special circumstances of Great Britain the disadvantages
(of devaluation) would greatly outweigh the advantages" and he concurred
with his colleagues in rejecting the idea. His name was John Maynard
Keynes.
And soon afterwards, another great British economist, Lionel Robbins,
declared that "no really impartial observer of world events can do other
than regard the abandonment of the Gold Standard by Great Britain as a
catastrophe of the first order of magnitude." This was long before the final
consequences of that step had become apparent—the political weakening
of the West which followed its economic breakdown and which contributed
to the success of the Na,zi revolution in Germany, and thus eventually to
the outbreak of the Second World War and to the emergence of Communism as an imminent threat to world order.
As if neither Keynes, the founder of the anti-classical school of economics, nor Robbins, the leader of the neo-classical school, ever had spoken,
9 5 - 6 7 8 O—73

22
some Keynesian and neo-classicist economists—fortunately with little
support at home but with encouragement from a few foreign observers—
are urging us to follow the British example of 1931 and to act once more
in a way that would destroy a payments system based on the fixed gold
value of the world's leading currency. In doing so, they not only show
that they have not learned from monetary history; they also impute to
our generation even less wisdom than was shown in the interwar period.
The British Government in 1931, and the U.S. Administration in 1933,
can rightly be accused of underestimating the adverse international effects
of the devaluation of the pound and the dollar. But at least they had some
plausible domestic grounds for their actions. They were confronted with
a degree of unemployment that has hardly ever been experienced either
before or after. They were confronted with disastrously falling prices,
which made all fixed-interest obligations an intolerable burden on domestic
and international commerce. They were confronted with a decline in
international liquidity, which seemed to make recovery impossible.
Neither Keynes nor Robbins have denied that, from a purely domestic
point of view, there was some sense in devaluation. In the United States
of 1933, one worker out of four was unemployed; industrial production
was little more than half of normal; farm prices had fallen to less than
half of their 1929 level; exports and imports stood at one-third of their
1929 value; capital issues had practically ceased. In such a situation, any
remedy, however questionable, seemed better than inaction.
In the Britain of 1931, things were not quite as bleak as in the United
States of 1933; but fundamentally, the economic problems were similar.
Ever since 1925, the British economy had failed to grow, and by 1931, one
out of five workers had become unemployed, exports—far more important
for the British economy than for our own—had declined by nearly one-half,
and most observers believed that over-valuation of the British pound was
largely responsible for all these ills. Can anybody in good faith find any
similarity between our position of today and our position of 1933, or even
the British position of 1931?
In 1931 and 1933, an increase in the price of gold was recommended in
order to raise commodity prices. Today, a gold price increase is recom-.
mended as a means to provide the monetary support for world price stability
In 1931 and 1933, an increase in the price of gold was recommended in
order to combat deflation; today it is recommended in effect as a means to
combat inflation. In 1931 and 1933, an increase in the price of gold was
recommended as a desperate cure for national ills regardless of its disintegrating effect on world commerce; today it is recommended as a means to
improve integration of international trade and finance. Can there be worse
confusion?
True, most advocates of an increase in the price of gold today would prefer action by some international agency or conference to unilateral action

23
of individual countries. But no international agency or conference could
prevent gold hoarders from getting windfall profits; could prevent those
who hold a devalued currency from suffering corresponding losses; could
prevent central banks from feeling defrauded if they had trusted in the
repeated declarations of the President of the United States and of the
spokesmen of U.S. monetary authorities and kept their reserves in dollars
rather than in gold. To this day, the French, Belgian, and Netherlands central banks have not forgotten that the 1931 devaluation of sterling wiped out
their capital; and much of the antagonism of those countries against the
use of the dollar as an international reserve asset should be traced to the
experience of 1931 rather than to anti-American feelings or mere adherence
to outdated monetary theories.
But most importantly, no international agency or conference could prevent a sudden large increase in the gold price from having inflationary
consequences for those countries that hoarded gold, and deflationary
consequences for those that did not. And the gold holding countries are
precisely those whose economies are least in need of an inflationary stimulus
since they are most prosperous—not prosperous because they are holding
gold, but holding gold because they are prosperous; in contrast, those
that do not hold gold are most in need of further expansion. Hence the
inflationary and deflationary effects of an increase in the price of gold would
be most inequitably and most uneconomically distributed among nations.
If we were to accept another sort of advice given by some experts, we
might repeat not the mistakes of 1931-33 but those of earlier years. We are
told that a repetition of the disaster of the Great Depression could be averted
only, or at least best, by returning to the principles of the so-called classical
gold standard. Not only should all settlements in international transactions
between central banks be made in gold; but also the domestic monetary
policy of central banks should be oriented exclusively to the payments
balance, which means to changes in gold reserves. Whenever gold flows
out, monetary policy should be tightened; whenever it flows in, it should
be eased.
This is not the place to discuss whether this pure form of gold standard
theory has ever been translated into practice. I doubt that any central
bank has ever completely neglected domestic considerations in its monetary
policy. And conversely, we do not need to adhere to an idealized version of
the gold standard in order to agree that considerations of international
payments balance need to play a large role in monetary policy decisions.
But even strict adherence to gold standard principles would not guarantee
international payments equilibrium. As a great American economist,
John H. Williams, put it in 1937:
"For capital movements, the gold standard is not a reliable corrective
mechanism. . . . With capital the most volatile item in the balance
of payments, it is apt to dominate and to nullify any corrective effects

24
which might otherwise result from the gold standard process of adjustment. . . . It is surely not a coincidence that most booms and depressions, in the nineteenth century as well as in the twentieth, had international capital movements as one of their most prominent features."
Even countries that advocate a return to gold standard practices do not
practice what they preach. Gold reserves of some Continental European
countries have been rising strongly and continuously for many years, and
according to the rules, these countries should follow a clearly expansionary
policy. But in order to offset inflationary pressures, they have done exactly
the opposite—and who is there to blame a country that wishes to assure
domestic financial stability even at the expense of endangering equilibrium
in international payments?
But obviously, if we permit one country to violate the rules of the gold
standard in order to avert domestic inflation, we must also permit another
country to violate those rules in order to avert domestic deflation and
unemployment. In other words, we must agree that a country may be
justified in avoiding or at least modifying a tightening of monetary policy
even though its gold reserves are declining, if otherwise it were to risk
precipitating or magnifying a business recession.
True, this deviation from gold-standard rules could be carried too far.
Domestic developments might be taken as a pretext to avoid an unpopular
monetary move, although the payments situation would seem to demand it
and although the action would be unlikely to be damaging to the domestic
economy. But the possibility of abuse and error is inherent in all human
decision, and just as no sane observer would ascribe infallibility to the decisions of central bankers, neither should he ascribe infallibility to a set of
rules. Few experts today would want to argue that it was right for the
German Reichsbank in 1931, in the middle of the greatest depression that
ever hit Germany, to follow the gold standard rules by raising its discount
rate to 7 percent merely in order to stem an outflow of gold: or that it was
right for our own Federal Reserve to take similar restrictive action for the
same reason, in the fall of 1931.
And just as the success of monetary policy cannot be guaranteed by an
abdication of discretion in favor of preconceived gold-standard rules, it cannot be guaranteed by following the advice of those who would shift the focus
of policy from national agencies to an international institution. Surely,
international cooperation should be encouraged and improved whenever
possible. And the functions of the International Monetary Fund might well
be enlarged so as to reinforce its ability to act as an international lender of
last resort and as an arbiter of international good behavior.
But no institutional change can exclude the possibility of conflicts between
national and international interests in specific circumstances. Moreover,
there is no reason to believe that such conflicts would necessarily be resolved
more wisely, more speedily, and with less rancor and dissent if they were

25
fought out in the governing body of some supra-national bank of issue rather
than by discussion and negotiation among national authorities.
It is true that such discussion and negotiation may prove fruitless and that
inconsistent decisions may be taken on the national level. But similarly, lack
of consensus within a supra-national agency may result in a paralysis of its
functions, and the effects of such paralysis could well be worse than those of
inconsistent national actions.
If then we doubt the wisdom of the three most fashionable recent proposals—to increase the dollar price of gold, to return to pure gold-standard
principles, or to delegate monetary policy to an international agency—what
should be our position? And what is the outlook for solving present and
future difficulties in international monetary relations, and thus for avoiding
a repetition of the disasters of 1929-33?
In my judgment, it is less fruitful to look for institutional changes or for
a semi-automatic mechanism that would guarantee perennial prosperity
than to draw from interwar experience some simple lessons that could save
us from repeating our worst mistakes.
First, most observers agree that to a large extent the disaster of 1929-33
was a consequence of maladjustments born of the boom of the twenties.
Hence, we must continuously be on the alert to prevent a recurrence of
maladjustments—even at the risk of being falsely accused of failing to
realize the benefits of unbounded expansion. Actually, those of us who
warn against speculative and inflationary dangers should return the charge:
our common goals of maximum production, employment, and purchasing
power can be realized only if we are willing and able to prevent orderly
expansion from turning into disorderly boom.
Second, most observers agree that the severity of the Great Depression
was largely due to the absence of prompt antirecession measures. In part,
the necessary tools for this were not then available nor were their potentialities fully understood. Today it is easy to understand where observers
went wrong 35 years ago. But it is less easy to avoid a repetition of the same
mistake; we always prefer to believe what we want to be true rather than
what we should know to be true. Here again, we need most of all eternal
vigilance. But we must also be ready to admit errors in past judgments
and forecasts, and have the courage to express dissenting even though
unpopular views, and to advocate necessary remedies.
Third, and most importantly, most observers agree that the severity
of the Great Depression was due largely to the lack of understanding of
the international implications of national events and policies. Even today,
we are more apt to judge and condemn the worldwide implications of
nationalistic actions taken by others than to apply the same criteria to
our own decisions.
Recognition of the close ties among the individual economies of the free
world leads to recognition of the need to maintain freedom of international

26
commerce. This means not only that we must avoid the direct controls of
trade and exchange that were characteristic of the time of the Great
Depression. It means also that we must avoid any impairment of the value
and status of the dollar, which today acts—-just as sterling did until its
devaluation in 1931—as a universal means of international payment
between central banks as well as among individual merchants, bankers,
and investors.
If the dollar is to continue to play its role in international commerce,
world confidence in its stability must be fully maintained; the world must
be convinced that we are resolved to eliminate the long-persistent deficit
in our balance of international payments. The measures taken in accordance
with the President's program of February 10, 1965, have so far been highly .
successful. But some of these measures are of a temporary character, and
these include the efforts of the financial community to restrain voluntarily
the expansion of credit to foreigners. We should not permit the initial
success of these efforts to blind us against the need for permanent cure.
Some observers believe that our responsibility for maintaining the international function of the dollar puts an intolerably heavy burden on our
monetary policy; that this responsibility prevents us from taking monetary
measures which might be considered appropriate for solving domestic
problems. I happen to disagree with that view. I believe that the interests
of our national economy are in harmony with those of the international
community. A stable dollar is indeed the keystone of international trade
and finance; but it is also, in my judgment, the keystone of economic
growth and prosperity at home.
Yet even if I were wrong in this judgment, and if indeed an occasion
arose when we could preserve the international role of the dollar only at
the expense of modifying our favored domestic policies—even then we
would need to pay attention to the international repercussions of our actions.
We must consider these international effects not because of devotion to the
ideal of human brotherhood, not because we value the well-being of our
neighbors more than our own. We must do so because any harm that would
come to international commerce and hence to the rest of the world as a
result of the displacement of the dollar would fall back on our own heads.
In the present stage of economic development we could not preserve our
own prosperity if the rest of the world were caught in the web of depression.
Recognition of this inter-dependence gave rise to the Marshall Plan—in
my judgment the greatest achievement of our postwar economic policy.
It should not have taken the Great Depression to bring these simple
truths home to us. Today, as we approach the goal of the "Great Society"—
to make each of our citizens a self-reliant and productive member of a
healthy and progressive economic system—we can disregard these truths
even less than we could a generation ago. By heeding them instead, we will
have a good chance to avoid another such disaster. If monetary history were
to repeat itself, it would be nobody's fault but our own.

APPENDIX B
STATISTICAL MATERIAL

INTERNATIONAL STATISTICS
TABLE 1.—U.S. BALANCE OF PAYMENTS, 1946-72
[Millions of dollars]

Merchandise
Year or
quarter

Private 3

U.S.
Government

-493
-455
-799
-621

750
997
1,177
1,200

6
50
85
73

733
946
374
230

114
-45
-27
-3

7,807
11,617
6,518
6,218

-2,922
-2,625
-4,525
-5,638

4,885
8,992
1,993
580

Military transactions

Exports

Imports

Net
balance

Direct
expenditures

Remittances, .
pensions,
and
other
unilateral
trans-i
fers

Net
travel
and
transportation expenditures

Sales

Net
balance

(88)
(8)
(8)
()

Net investment
income

Balance
Other on goods
services,
and
net services i

8
Balance
on current account

1946
1947
1948
1949

..
.
.
..

11,764
16,097
13,265
12,213

-5,067
-5,973
-7,557
-6,874

6,697
10,124
5,708
5,339

-493
-455
-799
-621

1950
1951
1952
1953
1954

..
..
..
..
.

10,203
14,243
13,449
12,412
12,929

-9,081
-11,176
-10,838
-10,975
-10,353

1,122
3,067
2,611
1,437
2,576

-576
-1,270
-2,054
-2,615
-2,642

(88) - 5 7 6
( ) -1,270
(8) - 2 , 0 5 4

192 - 2 , 4 2 3
182 - 2 , 4 6 0

1,382
1,569
1,535
1,566
1,899

78
151
140
166
213

-120
298
83
-238
-269

6
2
41
24
0

1,892
3,817
2,356
532
1,959

-4,017
-3,515
-2,531
-2,481
-2,280

-2,125
302
-175
-1,949
-321

1955
1956

.
.

14,424
17,556

-11,527
-12,803

2,897 - 2 , 9 0 1
4,753 - 2 , 9 4 9

200 - 2 , 7 0 1
161 - 2 , 7 8 8

2,117
2,454

180
40

-297
-361

-43
47

2,153
4,145

-2,498
-2,423

-345
1,722

6,271 -3,216
3,462 -3,435
1,148 -3,107

375 -2,841
300 -3,135
302 -2,805

2,584
2,416
2,658

4
168
68

-189
-633
-821

72
78
62

-14,744
-14,519
-16,218
-17,011
-18,647

4,906
5,588
4,561
5,241
6,831

-3,087
-2,998
-3,105
-2,961
-2,880

335
402
656
657
747

-2,752
-2,596
-2,449
-2,304
-2,133

2,825
3,451
3,920
4,056
4,872

16
-964
103
-978
132 -1,155
97 -1,312
3 -1,149

77
30
115
178
142

4,107
5,599
5,126
5,957
8,568

-2,292
-2,513
-2,631
-2,742
-2,754

1,815
3,086
2,495
3,215
5,814

-21,496
-25,463
-26,821
-32,964
-35,796

4,942
3,824
3,817
612
621

-2,952
-3,764
-4,378
-4,535
-4,856

830
829
1,240
1,392
1,512

-2,122
-2,935
-3,138
-3,143
-3,344

5,274
5,331
5,847
6,157
5,820

21
44
40
63
155

301
286
334
302
442

7,098
5,170
5,136
2,425
1,911

-2,835
-2,890
-3,081
-2,909
-2,946

4,263
2,280
2,055
-484
-1,035

574
3,563 -3,208
748
727 -3,574
795 -4,913 -3,737

356
-2,847
-8,651

1957
1958
1959

19,562 -13,291
16,414 -12,952
... 16,458 -15,310

1960
1961
1962
1863
1964

19,650
20,107
20,779
22,252
.. 25,478

1965
1966
1967
1968
1969

26,438
29,287
30,638
33,576
.. 36,417

2,164 -4,852
41,963 -39,799
1970
42,770 -45,459 -2,689 -4,816
1971
1972 a..... 47,391 -54,355 -6,964 -4,716
See footnotes at end of table.

1,478 -3,374
1,922 -2,894
1,153 -3,563

-1,318
-1,380
-1,763
-1,565
-1,784

6,376
-115 -2,061
8,952
-957 -2,432
9,211 -1,803 -2,589

5,901 -2,345
2,356 -2,361
310 -2,448

3,556
-5
-2,138

TABLE 1.—U.S. BALANCE OF PAYMENTS, 1946-72—Continued
Balance
on current
account
and longterm
capital
Private^

Long-term capital
Tlows, net
Year or
quarter

U.S. Government *

Nonliquid Allocashort-term tions of
private special
capital
drawing
flows,
rights
net»

Errors and
omissions,
net

Net liquidity balance

Liquid
private
flows,
nets

Official
reserve
transactions
balance

Changes in
liabilities
to foreign
official
agencies,6
net

Changes
in U.S.
official
reserve
assets,7
net

U.S. official
reserve
assets, net
(end of)
period

1946
1947
1948
1949

-253
-236
-131
158

155
861
1,115
717

-623
-3,315
-1,736
-266

20,706
24,021
25,758
26,024

1950
1951
1952
1953
1954

75
-227
-41
183
-556

-124
354
497
220
60

1,758
-33
-415
1,256
480

24,265
24,299
24,714
23,458
22,978

1955
1956
1957
1958
1959

-328
-479
-174
-145
-89

371
390
1,012
361
260

182
-869
-1,165
2,292
1,035

22,797
23,666
24,832
22,540
21,504

9-1,405
-l,200
9-657
9-968
-1,642

-1,098
-1,054
-1,206
-455
-1,048

2,145
606
1,533
377
171

19,359
18,753
17,220
16,843
16,672

1960
1961
1962
1963
1964

-889
-901
-892
-1,150
.. - 1 , 3 4 9

-2,100
-2,181
-2,607
-3,357
-4,470

-1,174
4
-1,003
-1,292
-4

9-3,676
9-2,251
9 -2,864
9-2,713
-2,696

9
273
9 903
9 214
9 779
1,162

-3,403
-1,348
-2,650
-1,934
-1,534

1,258
742
1,117
1,557
1,363

1965
1966
1967
1968
1969
1970
1971
1972 12...

-1,532 -4,577
-1,469 -2,555
-2,424 -2,912
1,198
-2,159
-50
.. -1,926

-1,846
-1,744
-3,280
-1,444
-3,011

-154
-104
-522
230
-640

-2,018 -1,398
-2,378 -4,079
-632
-959

-3,059
-9,304
-10,243

-482
-2,386
-611

1
2

-476
-302
-881
-399
-2,470
867
717
710

-1,174
-11,031
-2,951

Excludes military grants.
Adjusted from Census data for differences in timing and coverage.
s includes fees and royalties from U.S. direct investments abroad or from
foreign
direct investments in the United States.
4
Excludes liabilities to foreign official reserve agencies.
' P r i v a t e foreigners exclude the International Monetary Fund (IMF), but
include other international and regional organizations.
• Includes liabilities to foreign official agencies reported by U.S. Government and U.S. banks and U.S. liabilities to the IMF arising from reversible
gold
sales to, and gold deposits with, the United States.
7
Official reserve assets include gold, special drawing rights, convertible
currencies,
and the U.S. gold tranche position in the IMF.
8
Not available separately.
9
Coverage of liquid banking claims for 1960-63 and of nonliquid nonbankng claims for 1960-62 is limited to foreign currency deposits only: other

-2,477
-2,151
-4,683
-1,610
-6,122

1,188
2,370
1,265
3,251
8,824

-1,289
219
-3,418
1,641
2,702

-3,851 -5,988
-22,002 -7,763
-13,093
1,461

-9,839
-29,765
-11,632

67
1,222
-787
568
3,366
52
-761
-880
-1,515 -1,187
7,362
27,417
11,441

2,477
2,348
191

15,450
14,882
14,830
15,710
10

16,964

14,487
" 12,167
13,150

liquid items are not available separately and are included with nonliquid
claims.
10
Includes gain of $67 million resulting f r o m revaluation of the German
mark
in October 1969.
11
Includes $28 million increase in dollar value of foreign currencies revalued
to reflect market exchange rates as of December 3 1 , 1 9 7 1 .
12
First 3 quarters on a seasonally adjusted annual rates basis (except
reserve assets are end of December).
is includes increase of $1,016 million resulting from change in par value
of the U.S. dollar on May 8, 1972.
Sources: Department of Commerce (Bureau of Economic Analysis) and
Treasury Department.

32
TABLE 2.—U.S. RESERVE ASSETS, 1946-72
[Millions of dollars]

Total
reserve —
assets

End of year or
month

Gold stock '
Total 2

Treasury

Special
drawing
rights »

Convertible
foreign
currencies*

Reserve
position
in International
Monetary
Fund •

1946
1947
1948
1949
1950

20,706
24,021
25,758
26,024
24,265

20,706
22,868
24,399
24,563
22,820

20,529
22,754
24,244
24,427
22,706

1,153
1,359
1,461
1,445

1951
1952
1953
1954
1955

24,299
24,714
23,458
22,978
22,797

22,873
23,252
22,091
21,793
21,753

22,695
23,187
22,030
21,713
21,690

1,426
1,462
1,367
1,185
1,044

1956
1957
1958
1959
1960

23,666
24,832
22,540
21,504
19,359

22,058
22,857
20,582
19,507
17,804

21,949
22,781
20,534
19,456
17,767

1,608
1,975
1,958
1,997
1,555

1961
1962
1963
1964
1965

18,753
17,220
16,843
16,672
15,450

16,947
16,057
15,596
15,471
« 13,806

16,889
15,978
15,513
15,388
• 13,733

116
99
212
432
781

1,690
1,064
1,035
769
6
863

1966
1967
1968
1969
1970

14,882
14,830
15,710
7 16,964
14,487

13,235
12,065
10,892
11,859
11,072

13,159
11,982
10,367
10,367
10,732

851

1,321
2,345
3,528
7
2,781
629

326
420
1,290
2,324
1,935

1971
1972

10,206
10,487

10,132
10,410

1,100
1,958

»276
241

585
464

12,167
13,150

1
From 1956 through January 1972, includes gold sold to the United States by the International Monetary Fund (IMF) with the right of repurchase, and beginning 1965 also includes
lold deposited by the IMF to mitigate the impact on the U.S. gold stock of purchases by
oreign
countries for gold subscriptions on increased IMF quotas.
2
Includes gold in Exchange Stabilization Fund.
3
Includes initial allocation on January 1, 1970 of $867 million, second allocation on
January 1, 1971 of $717 million, and third allocation on January 1, 1972 of $710 million of
special drawing rights (SDR) in the Special Drawing Account in the IMF, plus or minus transactions in SDR.
*8 Includes holdings of Treasury and Federal Reserve System.
The United States has the right to purchase foreign currencies equivalent to its reserve
position in the Fund automatically if needed. Under appropriate conditions the United States
could purchase additional amounts equal to the United States quota.
• Reserve position includes, and gold stock excludes, $259 million gold subscription to the
Fund in June 1965 for a U.S. quota increase which became effective on February 23, 1966.
In figures published by the Fund from June 1965 through January 1966, this gold subscription
was included in the U.S. gold stock and excluded from the reserve position.
7
Includes gain of $67 million resulting from revaluation of German mark in October 1969,
of 8which $13 million represents gain on mark holdings at time of revaluation.
Includes $28 million increase in dollar value of foreign currencies revalued to reflect
market exchange rates as of December 3 1 , 1971.
Note.—Gold held under earmark at Federal Reserve Banks for foreign and international
accounts is not included in the gold stock of the United States.
Sources: Treasury Department and Board of Governors of the Federal Reserve System.

TABLE 3.-U.S. LIQUID AND OTHER LIABILITIES TO FOREIGN OFFICIAL INSTITUTIONS, AND LIQUID LIABILITIES TO ALL OTHER
FOREIGNERS
(In millions of dollars)
Liabilities to foreign countries
Official institutions 2

Liquid liabilities to
other foreigners

Liquid

Total

Liquid
liabilities to
IMF
arising
from
gold
transactions '

19,428

Shortterm
liabilities reported
by
banks

Nonmar- Nonmarketable,
ketable,
conMarketnonconvertible
able
vertible
U.S.
U.S.
U.S.
Treasury Treasury Treasury
bonds
bonds
bonds
and
and
and
notes
notes s
notes *

Other
readily
marketable
liabilities »

Liquid
liabilities
to commercial
banks
abroad °

Total

328
328

913
913

10,116
9,936

4,271
4,272

3,743
3,744

528
528

906
905

711
711

741
741

1,807
1,807

11,209
11,085

4,685
4,678

4,127
4,120

558
558

691
677

529
462

701
701

2,518
2,518

2,341
2,341

14,472
14,472

5,053
4,909

4,444
4,444

609
465

725
722

11,054
11,077

346
346

i°555
555

2,515
2,515

1,505
1,505

23,638
23,645

4,464
4,589

3,939
4,064

525
525

659
663

23,786
23,775

19,333
19,333

306
295

429
429

3,023
3,023

695
695

17,137
17,169

4,676
4,604

4,029
4,039

647
565

844
846

51,209
50,651

39,679
39,018

1,955
1,955

6,060
6,093

3,371
3,441

144
144

10,262
10,950

4,138
4,141

3,691
3,694

447
447

1,528
1,524

1972—Feb ... 69,998
Mar .. 71,013
Apr.... 72,215
May.. 72,115
Juner.. 74,001
July.. 77,465
Aug.r.. 79,454
Sept.. 79,731
Oct .. 81,422
Nov. .. 82,373
Dec. .. 82,902

52,799
53,806
54,093
53,579
54,604
59,416
60,601
60,070
60,926
61,122
61,503

40,679
40,980
38,723
37,850
38,603
39,777
40,611
39,628
40,261
40,040
39,976

2,399
2,644
2,668
3,018
3,292
3,516
3,881
4,117
4,457
4,834
5,236

6,094
6,094
8,594
8,594
8,594
12,094
12,094
12,095
12,097
12,098
12,108

3,441
3,723
3,723
3,723
3,723
3,647
3,647
3,804
3,651
3,651
3,639

186
365
385
394
392
382
368
426
460
499
544

11,373
11,464
12,433
12,822
13,444
12,128
12,911
13,585
14,180
14,781
14,821

4,204
4,194
4,242
4,285
4,475
4,493
4,419
4,630
4,823
4,745
4,951

3,812
3,818
3,853
3,890
4,103
4,123
4,041
4,241
4,417
4,322
4,526

392
376
389
395
372
370
378
389
406
423
425

1,622
1,549
1,447
1,429
1,478
1,428
1,523
1,446
1,493
1,725
1,627

1973—Jan.'.. 82,093
Feb.".. 87,873

60,779
68,455

38,516
45,395

5,798
6,377

12,110
12,110

3,780
3,627

575
946

14,824
12,791

4,897
5,006

4,472
4,634

425
372

1,621

1
Includes (a) liability on gold deposited by the IMF to mitigate the impact
on the U.S. gold stock of foreign purchases for gold subscriptions to the IMF
under quota increases, and fb) U.S. Treasury obligations at cost value and
funds awaiting investment obtained from proceeds of sales of gold by the
IMF
to the United States to acquire income-earning assets.
2
Includes BIS and European Fund.
' Derived by applying reported transactions to benchmark data; breakdown
of transactions by type of holder estimated 1959-63.
*8 Excludes notes issued to foreign official nonreserve agencies.
Includes long-term liabilities reported by banks in the United States and
debt securities of U.S. federally sponsored agencies and U.S. corporations.
* Includes short-term liabilities payable in dollars to commercial banks
abroad and short-term liabilities payable in foreign currencies to commercial
banks
abroad and to "other foreigners."
7
Includes marketable U.S. Treasury bonds and notes held by commercial
banks
abroad.
8
Principally the International Bank for Reconstruction and Development
and the Inter-American and Asian Development Banks. From December 1957
through January 1972 includes difference between cost value and face value
of securities in IMF gold investment account.
* Data on the two lines shown for this date differ because of changes in
reporting coverage. Figures on first line are comparable with those shown for

1,593

the preceding date; figures on second line are comparable with those shown
for the following date.
" I n c l u d e s $101 million increase in dollar value of foreign currency liabilities resulting from revaluation of the German mark in October 1969 as
follows:
liquid, $17 million, and nonliquid, $84 million.
11
Data on the second line differ from those on first line because certain
accounts previously classified as "official institutions" are included with
" b a n k s " ; a number of reporting banks are included in the series for the first
t i m e ; and U.S. Treasury securities payable in foreign currencies issued to
official institutions of foreign countries have been increased in value to
reflect market exchange rates as of December 3 1 , 1971.
Note: Based on Treasury Department data and on data reported to the
Treasury Department by banks and brokers in the United States. Data correspond generally to statistics following in this section, except for the exclusion of nonmarketable, nonconvertible U.S. Treasury notes issued to foreign
official nonreserve agencies, the inclusion of investments by foreign official
reserve agencies in debt securities of U.S. federally sponsored agencies and
U.S. corporations, and minor rounding differences. Table excludes IMF
"holdings of dollars," and holdings of U.S. Treasury letters of credit and nonnegotiable, non-interest-bearing special U.S. notes held by other international and regional organizations.

TABLE 4 . - G 0 L D PRODUCTION
(In millions of dollars: valued at $35 per fine ounce through 1971 and at $38 per fine ounce thereafter)

Period

World
production »

Ghana

Asia

North and South America

Africa
South
Africa

Zaire

United
States

Canada

Mexico

Nicaragua

Colombia

India

Japan

Other
Philippines

Australia

All
other
i

1966
1967
1968
1969

1.445.0 1,080.8
1,410.0 1,068.7
1,420.0 1,088.0
1,420.0 1,090.7

24.0
26.7
25.4
24.8

5.6
5.4
5.9
6.0

63.1
53.4
53.9
60.1

114.6
103.7
94.1
89.1

7.5
5.8
6.2
6.3

5.2
5.2
4.9
3.7

9.8
9.0
8.4
7.7

4.2
3.4
4.0
3.4

19.4
23.7
21.5
23.7

15.8
17.2
18.5
20.0

32.1
28.4
27.6
24.5

62.9
59.4
61.6
60.0

1970
1971 *
1972"

1,450.0

1,128.0
1,098.7
1,109.8

24.6
24.4

6.2
6.0

63.5
52.3
54.3

84.3
79.1
77.2

6.9
5.3

4.0
3.7

7.1
6.6

3.7
4.1

24.8
27.0

21.1
22.2

21.7
23.5 ..

54.1

6.5
6.4
6.6
7.5

.4
.4
.5

.7
.6
.5
.6

.4
.3
.3
.3

1972—January.
February
March...
April....

95.3 .
88.2 .
91.8
93.2

2 1.2

2.6
2.5
2.6
2.4 .

3.3 ...
2.5
2.0 ..
2.4 ...

May
June
July
August

6.8
6.2
6.4
5.9

.6
7
5
6

.4
.3
.4
.3

93.9
94.2

6.3
6.3

6
5 ...

94.4
94.3
94.4
94.1

...

2 1.0

September
October
November
December

91.5

6.0

84.3

6.3

1973—January

82.2

6.2

1
Estimated; excludes U.S.S.R., other Eastern European countries, China
Mainland, and North Korea.

'Quarterly data.

2.4
2.5
2.8
2.8

2.3
2.5
2.6

38
Table 5.—London Gold Price at P.M. Fixing, Jan.-May, 1973, Biweekly
(In U.S. dollars)

Jan. 2
Jan. 15.
Feb. 1
Feb. 15
Mar. 1
Mar. 15
Apr. 2
Apr. 16
May 1
May 15
Source: Board of Governors of the Federal Reserve System.

65. 10
65. 10
66. 60
73. 65
85. 70
82. 75
89. 25
89. 30
90. 70
110. 00

TABLE 6.—APPROXIMATE PRIVATE GOLD SALES IN ALL INTERNATIONAL MARKETS
[In millions of U.S. paper dollars at end of month]
1963

1964

1965

1966

1967

1968

1969

1970

1971

January
February
March
April
May
June
July
August
September
October
November
December

$165
200
240
210
220
260
275
255
300
285
325
310

$240
220
300
365
325
290
235
260
310
340
400
415

$510
525
490
370
325
315
475
380
290
375
315
325

$380
350
290
310
280
260
360
390
420
405
375
410

$380
345
390
375
445
510
445
410
370
420
650
985

$485
425
1,975
1,350
1,565
675
690
615
635
675
825
885

$520
310
290
230
275
205
340
325
310
330
280
215

$170
220
240
265
315
270
230
320
360
475
460
425

$415
440
425
450
625
430
550
710
985
480
510
560

Total

3,045

3,700

4,695

4,230

5,725

10,800

3,630

3,730

6,580

TABLE 7.—COMPARISON OF FEDERAL BUDGET ESTIMATES ORIGINALLY SUBMITTED TO CONGRESS AND FINAL RESULTS, UNDER THE
KENNEDY, JOHNSON, AND NIXON ADMINISTRATIONS—WITH PERCENT CHANGES IN PRICE INDEXES
[Dollars in billions]

Administration original budget
estimates submitted

Fiscal year

Actual budget results
Surplus
or
deficit

Receipts

Outlays

$92.5
98.8
97.9

$0.5
-11.9
-4.9

$86.4
89.5
93.1

$92.6
97.7
96.5

-$6.2
-8.2
-3.4

1963
1964
1965

1.6
1.2
1.9

-0.1
.4
3.4

99.7
112.8
135.0

-5.3
-1.8
-8.1

104.7
115.8
114.7

107.0
125.7
143.1

-2.3
-9.9
-28.4

1966
1967
1968

3.4
3.0
4.7

1.7
1.0
2.8

Outlays

Administrative budget:
1963—Kennedy
1964—Kennedy
1965—Johnson

$93.0
86.9
93.0

1966—Johnson
1967—Johnson
1968—Johnson

94.4
111.0
126.9

(-)

Percent
changes
in Wholesale
Price
Indexes
(all
commodities)

(-)

Receipts

Surplus
or
deficit

Percent
changes
in Consumer
Price
Indexes
(all
items)

Calendar year

Federal funds budget:
1971—Nixon
1973—Nixon

135.6
147.8
147.6

147.4
154.7
154.9

-11.8
-6.8
-7.3

143.3
143.2
133.8

148.8
156.3
163.7

-5.5
-13.1
-29.9

153.7
150.6
171.3

176.9
186.8
199.1

-23.1
-36.2
-27.8

148.8
154.3
NA

178.0
188.4
NA

- 2 9 . 1 1972....
- 3 4 . 1 1973
NA 1974

Total recommended budget deficts,
compared to actual results:
Kennedy administration, fiscal
year 1963-64
Average yearly
Johnson administration, fiscal
year 1965-70.
Average yearly
Nixon administration, fiscal year
1971-74.
Average yearly

-11.4
—5.7
—38.7
—6.5
—94.4
—23.6

1969
1970
1971

6.1
5.5
3.4

4.8
2.2
4.0

3.4
18.8
NA

6.5
121.1
NA

-14.4
—7.2
—62.6
2

—10.4
—93.3
—31.0

^
i—*

1
2

First quarter seasonally adjusted, annualized rate of increase.
Fiscal year 1971-73.

Source: Report of the Joint Study Committee on Budget Control Table
I; Economic Report of the President, Tables C-50, C - 5 1 .

42
TABLE 8.—CONSUMER PRICE INDEXES IN THE UNITED STATES AND OTHER
MAJOR INDUSTRIAL COUNTRIES, 1957-72
[1963 = 100]

Period

United
States

Canada

Japan

France

Germany

Italy

Netherlands

United
-Kingdom

91.9
94.4
95.2
96.7
97.7

91.7
94.1
95.1
96.2
97.1

79.3
78.9
79.8
82.6
87.0

69.6
80.1
85.0
88.1
91.0

88.1
90.0
90.9
92.1
94.3

83.2
85.5
85.1
87.1
88.9

88.0
90.0
91.0
93.0
95.0

86.9
89.5
90.0
90.9
94.0

1957
1958
1959
1960
1961
1962
1963
1964
1965
1966

..
..
..
..

98.8
100.0
101.3
103.1
106.0

98.3
100.0
101.8
104.3
108.2

93.0
100.0
103.9
110.7
116.4

95.4
100.0
103.4
106.0
108.9

97.1
100.0
102.3
105.8
109.5

93.1
100.0
105.9
110.7
113.3

97.0
100.0
106.0
111.0
117.4

98.0
100.0
103.3
108.2
112.4

1967
1968
1969
1970
1971

..
..
..
..
..

109.1
113.6
119.7
126.8
132.3

112.0
116.6
122.0
126.0
129.6

121.0
127.5
134.1
144.5
153.3

111.8
116.9
124.4
131.2
138.6

111.1
113.1
116.1
120.5
126.7

116.9
118.5
121.6
127.6
133.9

121.4
125.9
135.3
141.3
152.0

115.2
120.6
127.2
135.3
148.0

136.6

135.2

159.6

145.8

133.3

140.6

162.9

157.5

19721
1

For United States, 12-month average; for all other countries, January-October average.
Sources: Department of Labor and Organization for Economic Cooperation and .Development.

43
TABLE 9.—PERCENT APPRECIATION ( + ) OR DEPRECIATION ( - )
AGAINST THE DOLLAR '

Apr. 30,
1971 to
Dec. 18,2
1971
Currency of—
Australia
Austria
Belgium-Luxembourg
Canada
Denmark
Finland
France
Germany
Greece
Iceland
Ireland
Italy
Japan
Netherlands
Norway
Portugal
Spain
Sweden
Switzerland
Turkey
United Kingdom
See notes to table 10.

+8.6
+ 11.6
+ 11.6

+.8

+7.5
+2.4
+8.6
+ 13.6
0
0
+8.6
+7.5
+ 16.9
+ 11.6
+7.5
+5.5
+8.6
+7.5
+ 13.9
+7.1
+8.6

PreFebruary
1973 to
May 18,3
1973

+11.0
+12.8
+ 14.4
-.1
+ 11.8
+5.7
+ 15.2
+ 15.9
0
+8.3
+8.6
-1.2
+ 16.5
+ 12.7
+ 12.7
+7.9
+ 10.9
+6.7
+21.9
0
+8.6

Apr. 30,
1971 to
May 18,
1973

+26.3
+25.8
+27.7

+.8

+20.1
+8.2
+25.0
+31.6
0
-3.3
+6.4
+6.2
+36.2
+25.7
+21.1
+ 13.84
+20.4
+ 14.7
+38.8
+7.1
+6.4

44
TABLE 10.—WEIGHTED AVERAGE APPRECIATION AGAINST THE
DOLLAR »

OECD currencies
OECD currencies excluding
Canada

Apr. 30,
1971, to
Dec. 18,2
1971

PreFebruary
1973 to
May 18,3
1973

Apr. 30,
1971, to
May 18,4
1973

8.0

8.2

16.5

11.9

12.7

25.0

1
Calculated on basis of U.S. cents per foreign currency unit. Averages are
weighted on basis of U.S. bilateral trade pattern in 1970.
2
Calculated on basis of Apr. 30, 1971, par values and, for Dec. 18, 1971, new
par values or central rates following Smithsonian agreement. Market rates on
Apr. 30 and Dec. 24, 1971, were used for Canada, whose currency was floating.
3
Base rates are par values or central rates prevailing in early February 1973,
except for Canada and the U.K., for which base rates of U.S. $ 1 = C $ 1 and $2.35= 1£,
respectively, were taken as an approximate average of rates prevailing in the weeks
preceding the February market disturbances. Rates for May 18, 1973, are market
rates for most countries, and par values or central rates for a few of the smaller
countries whose rates are not available regularly.
4
Apr. 30, 1971, base rates and May 18, 1973, rates are as described in the
preceding footnotes.

45
TABLE ll.-GLOBAL BALANCE OF TRADE AND PAYMENTS OF
THE EUROPEAN COMMUNITY AND JAPAN, 1972
[In millions of dollars]

Country
France
Germany
Italy
Netherlands
Belgium-Luxembourg
United Kingdom
Denmark
Ireland
Japan
Subtotal, EC-6
Subtotal, EC-6+United Kingdom
Total, 9 countries

Merchandise
trade
balance

Current
account

Official
settlements l

1,357
8,414
923
0
944
-1,720
-716
-470
8,997

760
543
2,714
1,086
1,439
63
-109

1,600
4,790
-900
800
400
-3,690

6,656

ii
2,760

11,638

6,542

6,690

9,918
8,733

6,605

3,000

Not strictly comparable with U.S. definition.
Not available.
Note: Preliminary. Partly estimated by OECD and national authorities. Converted from SDR at central rates or par values prevailing in 1972.
2

Source: Treasury Department, May 9, 1973.

APPENDIX C

THE SECRETARY'S STATEMENT
Needed: A New Balance in International Economic Affairs
by the
Hon. George C. Shultz, Secretary of the Treasury
Before the
Boards of Governors of the IMF and the IBRD,
September 26,1972

THE SECRETARY'S STATEMENT
Statement by the Honorable George P. Shultz
The Secretary of the Treasury
of the United States of America
at the
1972 Annual Meetings
of the
Boards of Governors
of the
International Monetary Fund
and the
International Bank for Reconstruction and Development
and Affiliates
Tuesday, September 26, 7972
NEEDED: A NEW BALANCE
IN INTERNATIONAL ECONOMIC AFFAIRS
Mr. Chairman, Mr. Managing Director, Mr. President, Fellow Governors, Distinguished Guests:
The nations gathered here have it in their power
to strike a new balance in international economic
affairs.
The new balance of which I speak does not confine itself to the concepts of a balance of trade or a
balance of payments.
The world needs a new balance between flexibility and stability in its basic approach to doing
business.
The world needs a new balance between a unity
of purpose and a diversity of execution that will
permit nations to cooperate closely without losing
their individuality or sovereignty.
We lack that balance today. Success in the negotiations in which we are engaged will be measured
in terms of how well we are able to achieve that
balance in the future.
I anticipate working closely and intensively with
you to that end, shaping and reshaping the best
of our thinking as we proceed in full recognition
that the legitimate requirements of each nation
must be meshed into a harmonious whole.
In that spirit, President Nixon has asked me to
put certain ideas before you.
In so doing, I must necessarily concentrate my
remarks today on monetary matters. However, I
am deeply conscious that, in approaching this great
task of monetary reform, we cannot neglect the
needs of economic development. I am also conscious that the success of our development efforts

will ultimately rest, in large measure, on our ability
to achieve and maintain a monetary and trading
environment in which all nations can prosper and
profit from the flows of goods, services and investment among us.
The formation of the Committee of Twenty, representing the entire membership of the Fund, properly reflects and symbolizes the fact that we are
dealing with issues of deep interest to all members,
and in particular that the concerns of developing
countries will be fully reflected in discussions of
the reform of the monetary system.
As we enter into negotiations in that group, we
have before us the useful Report of the Executive
Directors, identifying and clarifying some of the
basic issues which need to be resolved.
We also look forward to participation by other
international organizations, with each contributing
where it is most qualified to help. The challenge
before us calls for substantial modification of the
institutions and practices over the entire range of
international economic cooperation.
There have already been stimulating contributions to our thinking from a wide variety of other
sources—public and private. I have examined with
particular care the statements made over the past
few months by other Governors individually and
the eight points which emerged from the deliberations of the Finance Ministers of the European
Community.
Drawing from this interchange of views, and
building upon the Smithsonian Agreement, we can
now seek a firm consensus for new monetary arrangements that will serve us all in the decades

(49)

50
ahead. Indeed, I believe certain principles underlying monetary reform already command widespread support.
First is our mutual interest in encouraging freer
trade in goods and services and the flow of capital
to the places where it can contribute most to
economic growth. We must avoid a breakup of
the world into antagonistic blocs. We must not
seek a refuge from our problems behind walls of
protectionism.
The pursuit of the common welfare through more
open trade is threatened by an ancient and recurring fallacy. Surpluses in payments are too often
regarded as a symbol of success and of good management rather than as a measure of the goods and
services provided from a nation's output without
current return.
We must recognize, of course, that freer trade
must be reconciled with the need for each country
to avoid abrupt change involving serious disruptions of production and employment. We must
aim to expand productive employment in all countries—and not at one another's expense.
A second fundamental is the need to develop a
common code of conduct to protect and strengthen
the fabric of a free and open international economic
order.
Such basic rules as " n o competitive devaluation"
and "most-favored nation treatment" have served
us well, but they and others need to be reaffirmed,
supplemented and made applicable to today's conditions. Without such rules to guide us, close and
fruitful cooperation on a day-to-day basis would
not be possible.
Third, in shaping these rules we must recognize
the need for clear disciplines and standards of
behavior to guide the international adjustment
process—a crucial gap in the Bretton Woods system. Amid the debate about the contributing causes
of past imbalances and the responsibility for initiative toward correction, sight has too often been
lost of the fact that adjusment is inherently a twosided process—that for the world as a whole, every
surplus is matched by a deficit.
Resistance of surplus countries to loss of their
surpluses defeats the objective of monetary order
as surely as failure of deficit countries to attack
the source of their deficits. Any effort to develop
a balanced and equitable monetary system must
recognize that simple fact; effective and symmetrical incentives for adjustment are essential to a
lasting system.
Fourth, while insisting on the need for adjustment, we can and should leave considerable flexibility to national governments in their choice among
adjustment instruments. In a diverse world, equal
responsibility and equal opportunity need not mean
rigid uniformity in particular practices. But they
do mean a common commitment to agreed international obiectives. The belief is widespread—and
we share it—that the exchange rate system must
be more flexible. However, important as they are,

exchange rates are not the only instrument of adjustment policy available; nor, in specific instances,
will they necessarily be the most desirable.
Fifth, our monetary and trading systems are an
interrelated complex. As we seek to reform monetary rules, we must at the same time seek to build
in incentives for trade liberalization. Certainly, as
we look ahead, ways must be found to integrate
better the work of the GATT and the IMF. Simultaneously we should insure that there are pressures
which move use toward adequate development
assistance and away from controls which stifle the
free flow of investment.
Finally, and perhaps most fundamental, any stable
and well functioning international monetary system
must rest upon sound policies to promote domestic
growth and price stability in the major countries.
These are imperative national goals for my government—and for yours. And no matter how well
we design an international system, its prospects
for survival will be doubtful without effective discharge of those responsibilities.
Today is not the occasion for presenting a detailed blueprint for monetary reform. However, I
do want to supplement these general principles
with certain specific and interrelated ideas as to
how to embody these principles in a workable
international agreement.
These suggestions are designed to provide stability without rigidity. They take as a point of
departure that most countries will want to operate
within the framework of specified exchange rates.
They would encourage these rates to be maintained
within specified ranges so long as this is accomplished without distorting the fabric of trade and
payments or domestic economic management. We
aim to encourage freer flows of trade and capital
while minimizing distortions from destabilizing
flows of mobile capital. We would strengthen the
voice of the international community operating
through the IMF.
I shall organize these ideas under six headings,
recognizing that much work remains to be done
to determine the best techniques in each area:
The Exchange Rate Regime
The Reserve Mechanism
The Balance of Payments Adjustment Process
Capital and Other' Balance of Payments Controls
Related Negotiations
Institutional Implications
1. The Exchange Rate Regime
We recognize that most countries want to maintain a fixed point of reference for their currencies
—in other words, a "central" or "par" value. The
corollary is a willingness to maintain and support
these values by assuring convertibility of their currencies into other international assets.
A margin for fluctuation for market exchange
rates around such central values will need to be
provided sufficiently wide to dampen incentives for
short-term capital movements and, when changes

51
in central values are desirable, to ease the transition.
The Smithsonian Agreement took a major step in
that direction. Building on that approach in the
context of a symmetrical system, the permissible
outer limits of these margins of fluctuation for all
currencies—including the dollar—might be set in
the same range as now permitted for non-dollar
currencies trading against each other.
We also visualize, for example, that countries in
the process of forming a monetary union—with
the higher degree of political and economic integration that that implies—may want to maintain
narrower bands among themselves, and should be
allowed to do so. In addition, an individual nation,
particularly in the developing world, may wish to
seek the agreement of a principal trading partner
to maintain a narrower range of exchange rate
fluctuation between them.
Provision needs also to be made for countries
which decide to float their currencies. However, a
country that refrains from setting a central value,
particularly beyond a brief transitional period,
should be required to observe more stringent standards of behavior in other respects to assure the
consistency of its actions with the basic requirements of a cooperative order.

2. The Reserve Mechanism
We contemplate that the SDR would increase in
importance and become the formal numeraire of
the system. To facilitate its role, that instrument
should be freed of those encumbrances of reconstitution obligations, designation procedures, and
holding limits which would be unnecessary in a
reformed system. Changes in the amount of SDR
in the system as a whole will be required periodically to meet the aggregate need for reserves.
A "central value system" implies some fluctuation in official reserve holdings of individual countries to meet temporary disturbances in their balance
of payments positions. In addition, countries should
ordinarily remain free to borrow or lend, bilaterally
or multilaterally, through the IMF or otherwise.
At the same time, official foreign currency holdings need be neither generally banned nor encouraged. Some countries may find holdings of
foreign currencies provide a useful margin of flexibility in reserve management, and fluctuations in
such holdings can provide some elasticity for the
system as a whole in meeting sudden flows of volatile capital. However, careful study should be given
to proposals for exchanging part of existing reserve
currency holdings into a special issue of SDR, at
the option of the holder.
The suggested provisions for central values and
convertibility do not imply restoration of a goldbased system. The rigidities of such a system, subject to the uncertainties of gold production, speculation, and demand for industrial uses, cannot meet
the needs of today.

I do not expect governmental holdings of
to disappear overnight. I do believe orderly
cedures are available to facilitate a diminishing
of gold in international monetary affairs in
future.

gold
prorole
the

3. The Balance of Payments Adjustment Process
In a system of convertibility and central values,
an effective balance of payments adjustment process is inextricably linked to appropriate criteria
for changes in central values and the appropriate
level, trend, and distribution of reserves. Agreement on these matters, and on other elements of
an effective and timely adjustment process, is essential to make a system both practical and durable.
There is, of course, usually a very close relationship between imbalances in payments and fluctuations in reserve positions. Countries experiencing
large deterioration in their reserve positions generally have had to devalue their currencies or take
other measures to strengthen their balance of payments. Surplus countries with disproportionate reserve gains have, however, been under much less
pressure to revalue their currencies upward or to
take other policy actions with a similar balance of
payments effect. If the adjustment process is to be
more effective and efficient in a reformed system,
this asymmetry will need to be corrected.
I believe the most promising approach would
be to insure that a surfeit of reserves indicates,
and produces pressure for, adjustment on the surplus side as losses of reserves already do for the
deficit side. Supplementary guides and several technical approaches may be feasible and should be
examined. Important transitional difficulties will
need to be overcome. But, in essence, I believe
disproportionate gains or losses in reserves may be
the most equitable and effective single indicator
we have to guide the adjustment process.
As I have already indicated, a variety of policy
responses to affect the balance of payments can
be contemplated. An individual country finding its
reserves falling disproportionately would be expected to initiate corrective actions. For example,
small devaluations would be freely permitted such
a country. Under appropriate international surveillance, at some point a country would have a prima
facie case for a larger devaluation.
While we must frankly face up to limitation on
the use of domestic monetary, fiscal, or other internal policies in promoting international adjustments in some circumstances, we should also recognize that the country in deficit might well prefer—
and be in a position to apply—stricter internal
financial disciplines rather than devalue its currency.
Only in exceptional circumstances and for a limited
period, should a country be permitted direct restraints and these should be general and nondiscriminatory. Persistent refusal to take fundamental
adjustment measures could result in withdrawal or
borrowing, SDR allocation, or other privileges.

52
Conversely, a country permitting its reserves to
rise disproportionately could lose its right to demand conversion, unless it undertook at least
limited revaluation or other acceptable measures
of adjustment. If reserves nonetheless continued
to rise and were maintained at those higher levels
over an extended period, then more forceful adjustment measures would be indicated.
For a surplus as for a deficit country, a change in
the exchange rate need not be the only measure
contemplated. Increasing the provision of concessionary aid on an untied basis, reduction of tariffs
and other trade barriers, and elimination of obstacles to outward investment could, in specific circumstances at the option of the nation concerned,
provided supplementary or alternative means. But,
in the absence of a truly effective combination of
corrective measures, other countries should ultimately be free to protect their interests by a surcharge on the imports from the chronic surplus
country.
For countries moving toward a monetary union,
the guidelines might be applied on a collective
basis, provided the countries were willing to speak
with one voice and to be treated as a unit for
purposes of applying the basic rules of the international monetary and trading system.
4. Capital and Other Balance of Payments Controls
It is implicit in what I have said that I believe
that the adjustment process should be directed
toward encouraging freer trade and open capital
markets. If trade controls are permitted temporarily
in extreme cases on balance of payments grounds,
they should be in the form of surcharges or acrossthe-board taxes. Controls on capital flows should
not be allowed to become a means of maintaining
a chronically undervalued currency. No country
should be forced to use controls in lieu of other,
more basic, adjustment measures.
5. Related Negotiations
We welcome the commitments which major nations have already made to start detailed trade
negotiations under the CATT in the coming year.
These negotiations, dealing with specific products
and specific restraints need not wait on monetary
reform, nor need monetary reform await the results of specific trade negotiations.
Those negotiations, and the development of rules
of good behavior in the strictly monetary area,
need to be supplemented by negotiations to achieve
greater equity and uniformity with respect to the
use of subsidies, and fiscal or administrative pressures on trade and investment transactions. Improper practices in these areas distort trade and
investment relationships as surely as d o trade barriers and currency disequilibrium. In some instances,
such as the use of tariff surcharges or capital controls for balance of payments purposes, the linkage is so close that the Committee of Twenty must

deal with the matter directly. As a supplement to
its work, that group can help launch serious efforts
in other bodies to harmonize countries' practices
with respect to the taxation of international trade
and investment, the granting of export credit, and
the subsidization of international investment flows.
6. Institutional Implications
As I look to the future, it seems to me that there
are several clear-cut institutional requirements of a
sensible reform of the monetary and trading system.
Several times today, I have stressed the need for
a comprehensive new set of monetary rules. Those
rules will need to be placed under guardianship
of the IMF, which must be prepared to assume an
even more critical role in the world economy.
Given the interrelationships between trade and
payments, that role will not be effectively discharged without harmonizing the rules of the IMF
and the CATT and achieving a close working relationship.
Finally, we need to recognize that we are inevitably dealing with matters of essential and sensitive national interest to specific countries. International decision-making will not be credible or
effective unless it is carried out by representatives
who clearly carry a high stature and influence in
the councils of their own governments. Our international institutions will need to reflect that reality,
so that in the years ahead national governments
will be intensively and continuously involved in
their deliberations and processes. Without a commitment by national governments to make a new
system work in this way, all our other labors may
come to naught.
I am fully aware that the United States as well
as other countries cannot leap into new monetary
and trading arrangements without a transitional
period. I can state, however, that after such transitional period the United States would be prepared
to undertake an obligation to convert official foreign
dollar holdings into other reserve assets as a part
of a satisfactory system such as I have suggested—
a system assuring effective and equitable operation
of the adjustment process. That decision w i l l , of
course, need to rest on our reaching a demonstrated
capacity during the transitional period to meet the
obligation in terms of our reserve and balance of
payments position.
We fully recognize that we have not yet reached
the strength we need in our external accounts. In
the end, there can be no substitute for such strength
in providing the underpinning for a stable dollar
and a stable monetary system.
An acceptable monetary system requires a w i l l ingness on the part of all of us to contribute to
the common goal of full international equilibrium.
Lacking such equilibrium no system will work. The
equilibrium cannot be achieved by any one country
acting alone.
We engage in discussions on trade and financial
matters with a full realization of the necessity to

53
continue our own efforts on a broad front to restore
our balance of payments. I must add, in all candor,
that our efforts to improve our position have, in
more than one instance, been thwarted by the
reluctance of others to give up an unjustified preferential and highly protected market position. Yet,
without success in our endeavor, we cannot maintain our desired share in the provision of aid, and
reduce our official debt to foreign monetary
authorities.
We take considerable pride in our progress toward price stability, improved productivity and
more rapid growth during the past year. Sustained

into the future, as it must be, that record will be
the best possible medicine not only for our domestic prosperity but for the effective functioning of
the international financial system.
My remarks today reflect the large agenda before
us. I have raised difficult, complicated, and controversial issues. I did not shrink from so doing for
a simple reason: I know that you, as we, want to
move ahead on the great task before us.
Let us see if, in Nairobi next year, w e can say
that a new balance is in prospect and that the main
outlines of a new system are agreed. We owe ourselves and each other that effort.

Full text of William McChesney Martin, Jr., Papers : International Monetary Crisis. Committee on Finance. United States Senate, Box 54, Folder 1

FRASER