Is our international monetary system heading toward a sudden collapse as in 1931, or toward the fundamental reforms needed to cure its most glaring and universally recognized shortcomings? Or will it continue to drift precariously from crisis to crisis, each one dealt with by belated rescue operations and the spread of restrictions and currency devaluations? Judging from past history, official statements and even intentions are unlikely to provide reliable answers to these questions, for they are more often designed to reassure than to enlighten. The Governor of the Bank of England, Sir Leslie O'Brien, candidly confessed to a Cambridge audience last spring: "I am rapidly qualifying as an instructor on how to exude confidence without positively lying." Another reason is that major changes in the international monetary system have rarely been the result of conscious planning. They have most often been the by-products of broad historical forces or accidents, defying contemporary forecasts and official intentions.

Official negotiations on international monetary reform were launched, five and a half years ago, with a confident agreement "that the underlying structure of the present monetary system-based on fixed exchange rates and the established price of gold-has proven its value as the foundation for present and future arrangements." (Statement issued on October 2, 1963, by the Secretary of the Treasury of the United States on Behalf of the "Group of Ten" Members of the Fund.)

The snail's pace of these negotiations, however, and the recurrent and snowballing gold and foreign-exchange crises of recent years have spread mounting doubts regarding these two pillars of the gold-exchange standard. The disbanding of the famed Gold Pool and the introduction of the so-called two-tier gold market in March 1968 were not the planned and deliberate outcome of the negotiations in process, but rather the defeat of fourteen years of efforts to preserve the $35 price in the private as well as in the official market. The optimists-like myself-still hope against hope that these decisions will prove the first, and constructive, steps toward a gradual elimination of gold as the ultimate and obviously absurd regulator of reserve creation and destruction. The speculators still choose to view it, however, as the harbinger of a further defeat of official policies and of an eventual and substantial increase in official, as well as private, gold prices. Few, if any, observers give much credence to the third interpretation professedly favored by the officials-namely, that the two- tier gold market is a lasting step toward the consolidation of the $35-an- ounce gold-exchange standard of yesteryear.

The second pillar of the Group of Ten policies, i.e. the fixity of exchange rates, is equally assailed today, not only by academics, but even by Congressional leaders and responsible officials, here and abroad. Various forms of exchange-rate flexibility[i] are seriously discussed and advocated as the only realistic cure for the recurrent foreign-exchange crises involving the major currencies of the Western world, and particularly for the persistent deficits of the United Kingdom and the United States, which both countries have repeatedly promised but failed to correct.

In brief, official intentions and pronouncements appear in retrospect a most unreliable guide to the recent evolution of the international monetary system, and are therefore widely mistrusted as a basis for confidence in its future stability. Far better clues and safer predictions can be derived, in my opinion, from analysis of a broader historical perspective and the persistent trends which emerge so clearly from it concerning the direction of changes in our national and international monetary institutions.

II

The first lesson that history teaches us is that these institutions have always been carried forward by an irrepressible evolutionary process, the strength of which was repeatedly misunderstood, underestimated or even totally overlooked by contemporary observers, academic as well as official. Even today, many people evoke with nostalgia the nineteenth-century gold standard, and remain blissfully unaware of the fact that silver far outpaced gold in importance until the latter half or third of that century, and that paper money-currency and bank deposits-had largely superseded both gold and silver moneys well before the outbreak of the First World War.[ii] Whatever stability can be ascribed to the monetary system of those days should not be credited to its automatic regulation by haphazard gold and/or silver supplies, but to the gradual euthanasia of these two "commodity- moneys" and their increasing replacement by man-made "credit-moneys." (Indeed, the near-monopoly of gold and silver money throughout the previous centuries had been accompanied by a gradual and uneven debasement of the coinage, reducing the pound sterling and the franc, for instance, to roughly one-fourth and one-tenth, respectively, of their thirteenth-century gold content.)

A second lesson derives from the first. In every national monetary system the world over, the broad direction of this evolutionary process has been from commodity-money to credit-money. At first the creation of this credit- money was left to the discretion and wisdom of multiple banking firms, but later it was gradually brought under the centralized supervision of national monetary authorities (treasuries and central banks).

As distinct from the former commodity-moneys, however, the new national credit-moneys commanded general acceptability only within the national borders of each country; they were not accepted, or at least retained, in payment by the residents of other countries. The settlement of international transactions required, therefore, the exchangeability of national currencies. This responsibility was gradually concentrated in the national central banks and, to settle net imbalances in international transactions, it was necessary for each of them to accumulate international reserves acceptable to other central banks.

The evolution of these international reserves parallels closely, although with a considerable lag, that of the national monetary systems. Commodity- reserves are being gradually displaced by credit-reserves in the international monetary system, just as commodity-moneys were previously superseded by credit-money in the national monetary systems. A parallel evolution can be noted with respect to centralization of responsibility. Commodity reserves-in the form of gold-accounted for about 91 percent of world monetary reserves on the eve of the Second World War, but for only 53 percent as of last September. Decentralized credit-reserves-in the form of foreign exchange, i.e. overwhelmingly dollars and pounds sterling-rose over the same period from 9 to 38 percent of world reserves, and centralized credit-reserves-in the form of claims on the International Monetary Fund- from 0 to 9 percent.

These trends have accelerated considerably in recent years, and particularly in 1968. In the first nine months of that year, reserves in the International Monetary Fund (IMF) rose spectacularly by $850 million, while the foreign-exchange component of world reserves dropped by $275 million, and their gold component by $840 million.

This gradual shift from uncontrolled commodity-moneys and reserves to man- made credit-moneys and reserves, and later on to a conscious orientation toward the latter by national governments and international institutions, is likely to provide the best clue to future trends. This is the more true as such a shift can be viewed in a broader perspective of the evolutionary process: the persistent endeavors of man to control his physical environment rather than be controlled by it. One may hardly accept the view that these efforts could, or should, be frustrated forever as far as the international monetary system is concerned, and that reserve creation should be abandoned indefinitely to the irrelevant factors that determine it today: the hazards of gold production, industrial consumption, hoarding and speculation, and/or the international financing of unpredictable U.S. and U.K. deficits through the incorporation of their resulting dollar and sterling IOUs in the monetary reserves of the rest of the world.

III

Short-run predictions, however, remain far more hazardous than long-run predictions, for the orderly progress of this evolution is dependent on the adaptability of the institutional and legal framework within which it takes place. Conscious governmental and international action is needed at times to smooth its path, but may also make it far bumpier through misguided action or-as happens far more frequently-through excessive inertia and stubborn resistance to needed reforms.

The repeated financial crises that preceded, but finally impelled, the creation of the Federal Reserve System in the United States can be ascribed to the political resistance to centralized monetary management in this country. On the whole, however, the irrepressible evolution of national monetary systems from commodity-money to centralized credit-money encountered fewer legal and institutional obstacles than did the later and similar evolution of the international monetary system. The centralized supervision of national credit-money systems was part of the increasing role and powers assumed by national states in the direction of their economies. International agreements among theoretically sovereign states about the composition and management of international reserves were, and still are, far more difficult to achieve.

Numerous international conferences failed, over the last century, to elicit any such agreement. The actual composition of reserve assets shifted radically over this century from bimetalism to gold and later to the uneasy coexistence of gold, reserve-currencies (dollars and sterling) and claims on the IMF. None of these changes-except for the creation of the IMF itself- was ever initiated by deliberate government planning. They were mostly the combined by-products of the absence of agreement and of the relative availability and attractiveness of alternative reserve assets.

The failure to reach international agreement as to what should constitute an internationally acceptable reserve asset at first ensured the survival of traditional commodity-moneys, even after they had lost this role within the national monetary systems themselves. The elimination of silver in favor of gold alone was belatedly ratified-rather than initiated-by the governments. The initial step in this direction can be traced back to the totally inadvertent slip of Great Britain into a de facto gold standard, as a consequence of the 1696 recoinage of outworn silver coins. Gresham's law that "bad money drives out good" was not enacted by the British Parliament, but explains why the new, full-bodied silver coins minted by a government intent on preserving the traditional silver standard quickly disappeared from circulation, as their increased silver content gave them a somewhat higher value on the commodity markets than the legal conversion ratio between silver and gold at the Royal Mint.

The other, and even more radical, shift from the gold standard to the gold- exchange standard, in the 1920s, was also a de facto reaction to the unplanned impact of the war upon the monetary and reserve systems of those days. Wartime operations and postwar reconstruction had been financed in large part by monetary inflation. This had drastically curtailed the ratio of monetary gold stocks to the vastly expanded volume of national paper moneys, and created a "gold shortage" which became the subject of endless debates at gatherings of international experts and central bank meetings in Brussels (1920), Genoa (1922) and the Gold Delegation of the League of Nations (1929-1932). A broad consensus emerged at these meetings to recommend the expanded use of the "gold-convertible" currencies of major financial centers as a supplement to scarce gold. This solution was particularly favored and propagandized by British experts who rightly expected to see sterling-the most prestigious currency of the largest and oldest trading and financial center of the world-play the major role; it would enable the United Kingdom to finance its deficits and/or strengthen its slender gold reserves through the acceptance of its own paper IOUs as international reserves by other central banks. Both expectations proved correct but involved a quasi-automatic financing by other countries of Britain's return to an overvalued rate for sterling and of the balance-of- payments deficits that ensued.

While none of the conferences produced any firm agreements and commitments in this respect, the major "gold-convertible" currencies-particularly sterling, first, and later the dollar-gained increasing acceptance as monetary reserves. Since reserve holders remained free to switch, at any time, from one currency into another, or into gold, a dangerous instability was built into the system.

The Gold Delegation was still debating the ways and means that would prevent an abuse of the system by the reserve centers and protect it against destabilizing switches by their creditors when these very defects prompted the collapse of the pound sterling in September 1931. For a while, this sounded the death knell of the gold-exchange standard, a generalized rush into gold reserves, and a protracted period of beggar-my-neighbor devaluations and trade and exchange controls.

During and after the Second World War, the gold-exchange standard was revived, on the same precarious basis, bringing back the same abuses and sources of instability that killed it in 1931. The financing of World War II and of postwar reconstruction entailed, as in the case of World War I, a new bout of inflation, curtailing once more the ratio of gold reserves to the increased volume of national paper moneys. The latter continued to rise with the unprecedentedly high rates of economic growth sustained in later years. The resulting "gold shortage" was again made up by huge acquisitions of sterling and dollar balances legally convertible at any time into gold. The day would inevitably come-as I pointed out as early as 1957-when a "liquidity shortage" would arise, either as a result of such conversions of overflowing dollar and sterling balances into scarce gold metal, or because the United States and the United Kingdom would seek-and succeed-to protect themselves against such a danger by eliminating the balance-of-payments deficits which now fed most of the increases in world monetary reserves. This gloomy prognosis was scornfully dismissed at first by overcomplacent officials, but was later accepted by them, prompting in 1963 the opening of another marathon debate on the need for international monetary reform.

One may still hope, however, that the outcome will be less disastrous than it was in 1931. First of all, the world economy is in far better shape today than it was then, and the overall economic and financial position of the United States is far stronger than that of Britain in 1931. Even more important, the world's monetary and financial leaders are now keenly aware of the disastrous consequences which any repetition of the 1931 policies, or lack of policies, would entail for the international monetary, economic and even political fabric of the West. They have developed, indeed, particularly since the first flare-up of gold prices in London in October 1960, an unprecedented degree of international coöperation and an uncanny ability to cope with recurrent crises one after another. They have also acquired an understanding of the basic problems and a sense of joint responsibility for their solution far greater than ever existed in the past.

IV

Thus, history need not repeat itself. Our hope that it will not springs primarily from the unprecedented insight now gained by responsible officials regarding the functioning of our international monetary system and the consensus already reached by them regarding the shortcomings that must be remedied by the three major reforms now under negotiation:

The creation of international reserves should be deliberately oriented toward satisfying the requirements of feasible growth in world trade and production.

The resulting reserve pool should be protected against destabilizing switches between reserve assets, and primarily between reserve currencies and gold.

These reforms in the overall amount and composition of the world reserve pool must be accompanied by a strengthening of the adjustment mechanism, facilitating the financing of temporary, reversible disequilibria, but also ensuring more prompt correction of persistent disequilibria, rather than their perpetuation either by inflationary financing or by trade and exchange controls.

This consensus should, and some day undoubtedly will, lead to agreement on the kind of reform suggested by past historical trends-i.e. the development of a truly international credit-reserves standard aiming at the simultaneous fulfillment of all three of these objectives.

Indeed the cornerstone of such a reform has already been laid by the unanimous Rio resolution on the creation of a new reserve instrument (the so-called Special Drawing Rights, or SDRs) to be issued by the IMF in the amounts deemed necessary by the international community itself to meet future reserve needs. This was undoubtedly the hardest hurdle that the negotiators had to surmount, and contrasted sharply with their earlier myopic denunciation of such a proposal as a dangerous and utopian dream- unattainable "today and for any foreseeable future,"-to set up a "super- bank" with "no supporting super-government to make good on its debts or claims."[iii]

The Rio negotiators showed rare vision and courage in setting up this central piece of the international monetary machinery of the future, but unfortunately left for later determination the role to be played by the traditional components of the gold-exchange standard (i.e. gold and the reserve currencies). The sterling, dollar and gold crises that were soon to dampen the high hopes evoked by the Rio agreement arose from the inability of the negotiators to tackle with the same vision and courage the more urgent problems raised by the coexistence of overflowing dollar and sterling reserves with the dwindling gold stocks into which they were legally convertible under the rules of the ill-fated gold-exchange standard.

The basic conflict that has so far prevented full agreement on this issue reflects an unrealistic assessment by the reserve-currency debtors and creditors alike of their true national interests. The reserve-currency debtors-primarily the United States and the United Kingdom-welcome the new reserve asset as a supplement, or even an ultimate substitute, for scarce gold, but are understandably reluctant to renounce the privilege of financing a substantial portion of their deficits through other countries' accumulation of their IOUs as international reserves. The reserve-currency holders of continental Europe, on the other hand, still see in gold settlements their ultimate protection against the inflationary potential and surrender of national sovereignty entailed in the accumulation of dollar and sterling IOUs financing U.S. and U.K. policies in which they have no voice and which they may, at times, consider directly contrary to their own interests or those of the world community. This conflict has been exacerbated in recent years by the size and persistence of British and American deficits and the fact that they could be ascribed, at least in part, to the laxity of monetary and fiscal policies-particularly in the United Kingdom. It has been further aggravated by the inflationary pressures triggered in the United States by the escalation of the Viet Nam war, and to what some Europeans regard as an excessive take-over of European enterprises by American capital.

V

Paradoxically, the main hopes for a negotiated agreement spring from the very sharpness of this conflict and from the consequent realization in both camps that neither gold nor reserve-currencies can in fact expand, or even retain, their previous role in monetary settlements.

This conclusion is being forced upon the United Kingdom and the United States by the resistance of other countries to the acquisition and retention of traditional sterling and dollar balances as growing components of their monetary reserves. These traditional "liquid" holdings of sterling and dollar IOUs by foreign central banks rose spectacularly from about $2 billion in 1937 to a peak of nearly $20 billion in 1963, but have declined even more spectacularly since then to about $13 billion in September of last year. Thus, the traditional reserve-currency role of sterling and dollar balances no longer assures Britain and the United States special facilities for the financing of their current deficits. It exposes them, on the contrary, to the enormous and unbearable risk of sudden or massive repayment of the enormous short-term indebtedness accumulated by them over many years past.

The creditor countries, however, also realize that insistence on gold repayment would inevitably bring about another 1931, as neither the United Kingdom nor even the United States could actually stand such a drain on its gold reserves. The total amount of these ($12 billion as of last September) is considerably short of their gold-convertible obligations to central banks and the International Monetary Fund ($28 billion).

Both groups of countries have thus been impelled by their own self-interest to negotiate new agreements based on the realities of the situation rather than on their previous hopes and expectations. The acquisition and retention of sterling and dollar assets by the major reserve holders of Western Europe, and even by the sterling-area countries, have become increasingly dependent upon such negotiated agreements. Gold or exchange guarantees against devaluation risks were grudgingly granted by the United Kingdom and the United States in order to deter their creditors from speculative switches of their reserve assets from sterling into dollars, or from both into gold. The creditor countries, on the other hand, agreed to retain a specific portion of their total reserves in sterling, and to convert part of their "liquid" dollar claims into longer-term obligations.

Taken together, these various agreements, negotiated since 1963, now cover well over $11 billion of the combined dollar and sterling reserves ($24 billion) of foreign reserve holders. A further $3.3 billion of reserve credits have been extended to the United Kingdom and the United States through the mediation of the International Monetary Fund. Finally, a vast array of reciprocal credit lines-in the form of so-called "swap" or "reciprocal currency" agreements-have been negotiated among major central banks to protect them against speculative attacks on any one of their currencies.

All these negotiations and arrangements testify to the death of the traditional "gold-exchange standard" and to a de facto gradual shift toward what might be called a "negotiated credit-reserves standard." The official negotiators should be congratulated for having been able to avoid, in this way, a total collapse of the international monetary order. The new system, however, remains highly precarious, for it depends on continuous negotiation and re-negotiation of the short- or medium-term credit lines on which it rests. Some of the countries called upon to provide such financing also feel that it fails to provide adequate protection against the abuse of such facilities, primarily by the United States. They cling tenaciously to their legal right to gold conversion as their ultimate protection against such abuses and the total surrender of monetary sovereignty which might be imposed upon them if they were incorporated into a formal or informal "dollar area." The continuation of recent trends in that direction would be bound, sooner or later, to trigger a major breakdown, political as well as economic and financial, among the countries of the Atlantic Community. Responsible circles in the United States are keenly conscious of this danger, as is evidenced in the unanimous report of the Congressional Subcommittee on International Exchange and Payments last September.

Gold, however, is incapable of providing a reasonable alternative to a "dollar-area" system of international reserves and settlements. The $3.7 billion losses experienced by the Gold Pool countries over a short period of six months (October 1967-March 1968) forced the liquidation of the pool and the hurried adoption of a precarious and ambiguously phrased agreement among its members-with the exception of France-that would, if faithfully and generally observed in the spirit as well as in the letter, freeze forever both the official gold price and the world monetary gold stock at their levels of March 18, 1968, irrespective of future developments in the private gold market.

This is most unlikely indeed to provide a long-term solution to the gold problem, as central banks can hardly be expected to remain forever indifferent to market developments regarding the price of a commodity in which they have invested close to $40 billion and which is still regarded by public opinion in many countries-no matter how erroneously-as the ultimate guarantee of their mounting issues of paper money.

If gold were the only alternative to a dollar-area system, governments would sooner or later have to resign themselves either to a fluctuating gold price, or to a substantial increase in its present price. In all probability, this would set the clock back to 1931, and postpone for many years to come the evolution toward rational reforms of the anachronistic and haphazard gold-exchange standard of yesteryear.[iv]

VI

The way out of the present impasse lies in a comprehensive reform plan, inspired by the long-term historical evolution of the international monetary system. It should encompass all major aspects of the problem and thereby give adequate recognition to the convergent interests and feasible policy objectives of all countries concerned.

It was eighteen months ago that unanimous agreement was reached at Rio de Janeiro on the keystone of such a reform: the deliberate creation of centralized reserve assets in the form of internationally guaranteed claims on the IMF, usable and acceptable by all countries in all balance-of- payments settlements. A keystone, however, is not an edifice. The reform cannot stop with the mere superimposition of the new reserve asset upon the traditional ones. It must encompass the role of all three types of reserve assets-gold and reserve currencies as well as SDRs-in the orderly growth of world reserves and the improvement of the adjustment mechanism. The new reserve asset should be created by international agreement, in the amounts needed to substitute for-rather than merely add to-dwindling gold supplies and overflowing reserve currencies, and to adjust overall reserve growth to the requirements of an expanding world economy rather than to the vagaries of the gold market and of U.S. and U.K. balance of payments.

Surplus countries should accept such assets in settlement, retain them as reserves and be able to use them at any time to settle later deficits in their own international payments. They would remain free, of course, to slow down-or even reverse-their reserve accumulation by taking action to reduce their surpluses through trade or exchange liberalization, more expansionist monetary and fiscal policies, and/or larger outflows of capital. They should not be entitled, however, to force deflation, devaluation or restrictions upon the rest of the world by insisting on gold payments in excess of available supplies. Nor should they be allowed to arrogate to themselves the right to accumulate international reserves in any national currency they choose and then to switch at any time from one currency to another. All countries should agree to deny each other a right which exposes them to political blackmail by the reserve debtors as well as by the reserve holders. Surpluses should be accumulated exclusively-except for working balances-in the new IMF reserve asset.

Such a commitment by the surplus countries would endow the IMF with the lending potential needed to finance the deficits which are the counterparts of the other countries' surpluses. The overall volume of such financing, however, would be limited by rules restricting the IMF's creation of reserves to the amounts needed to sustain feasible, but non-inflationary, growth of the world economy. A presumptive guide-line of 4 to 5 percent per year would probably rally widespread agreement in this respect, but exceptions should be authorized, by qualified majority vote, to combat actual worldwide inflationary or deflationary pressures.

The use and allocation of this lending potential should be a matter for international decision, based on a collective judgment regarding the nature of the deficits. Temporary, reversible deficits, such as those triggered by speculative shifts of private funds among major financial centers, should be met by compensatory shifts of IMF investments from the countries in surplus to the countries in deficit. Persistent deficits calling for correction should be financed only as part and parcel of an agreed stabilization program, designed to eliminate them with a minimum of hardship to the deficit countries themselves as well as to their partners in world trade and finance. External deficits accompanied by internal inflationary pressures are a sign of "overspending," which should be corrected by changes in fiscal and monetary policies designed to equate expenditures with the country's productive capacity. On the other hand, the coincidence of deficits with deflationary pressures and unemployment would suggest that the root cause of the trouble lies in uncompetitive levels of prices and costs, for which a readjustment of exchange rates will often prove the most appropriate remedy.

If the deficit country feels unable to agree with its IMF partners on the action to be taken, it will, of course, retain its "sovereign" right to conduct its own affairs as it wishes, but not to obtain financing from other "sovereign" countries which disagree with its policies. The gradual depletion of its monetary reserves will willy-nilly force an adjustment of its exchange rate, though trade and exchange restrictions may postpone the day, if they are not made ineffective by other countries' retaliatory action.

More and more people now advocate a shift from stable to flexible exchange rates-whether or not they are limited to an agreed "band" or rate of "crawl"-as a way to strengthen the adjustment process in a nationalistic world. This would be an attractive solution for the disequilibria ascribable to international cost-price disparities, but might tend to foster unnecessary instability and actual distortions of exchange rates in the other two cases of deficits which call instead for financing or for changes in monetary and fiscal policies.

The reforms outlined so far would, moreover, remedy only imperfectly the so- called "deflationary bias" of the international monetary system. They would force the surplus countries to finance, but not to eliminate, disequilibria caused by deflationary errors in their own policies or to an undervalued exchange rate. Ideally, an excessive rate of reserve accumulation, even in the form of claims on the IMF, should force them to enter into policy consultations with the IMF, just as an excessive rate of reserve losses already imposes such consultations upon the deficit countries. In the absence of agreement, they should be enjoined from preventing an appreciation of their exchange rate through further market interventions and excessive reserve accumulation.

Merely to allow exchange-rate flexibility would be insufficient for this purpose, as was amply demonstrated by the outcome of the Bonn conference called last November to deal with the difficulties created for other countries by the obdurate surpluses of Germany and the rush of speculative capital into German marks. The United States, Britain, France and presumably other countries felt strongly that the best solution to the problem was a revaluation of the German mark, but even their combined pressure failed to persuade the German leaders to accept such advice. One may sympathize with the German view that the over-competitiveness of the mark is the result of the inflationary policies of other countries rather than of any deflationary policies in Germany. Yet, after such a situation has been allowed to develop, price or exchange-rate adaptations by Germany itself may prove far more feasible and less damaging to all concerned than alternative deflationary action or devaluation by many other countries.

VII

Agreement on all aspects of such ambitious reforms will obviously take time and will have to deal with a number of transitional problems, particularly regarding gold and the bloated reserve-currency balances inherited from the past. Both problems could be met through the creation of an International Conversion Account that would convert into reserve deposits or certificates, identical to the SDRs, all reserve-currency balances in excess of those actually needed for daily interventions in the exchange market. The Account would also issue such deposits or certificates in exchange for the gold it needed to intervene in the gold market, as its members jointly saw fit, in order to regain control over a market now abandoned to speculators by the two-tier decision of March 1968.

This proposal is no longer deemed as utopian and unnegotiable as it appeared to many when I first formulated it a few years ago. The abortive Maudling plan of 1962, but particularly the comprehensive sterling agreements of last September, demonstrate Britain's receptiveness to such a solution of the sterling problem. In the United States, its main features were unanimously endorsed last September by the Congressional Subcommittee on International Exchange and Payments. Concrete proposals for such a "Conversion Account" were also developed by Finance Minister Colombo of Italy, and forcefully advocated by him at the last annual meeting of the IMF as an essential complement to the SDR agreement. Finally, President de Gaulle himself should logically welcome a plan that meets the two basic objectives repeatedly emphasized in all his speeches: the elimination of the "exorbitant privilege" of the reserve-currency countries to pay their deficits with their own IOUs, and "the organization of international credit . . . on an indisputable monetary basis bearing the mark of no particular country."

De Gaulle, of course, proposes that the basis be gold, while most of my academic colleagues and Congressional friends would, on the contrary, accelerate the "demonetization" of gold by converting all national gold reserves overnight into Conversion Account deposits or certificates, I would myself favor such a solution, but do not feel that it will be negotiable until familiarity and experience with the new system have demonstrated its practicability and developed sufficient trust in the wisdom and fairness of its management.

Such an abrupt transformation of ingrained institutions and habits of mind is, in any case, unnecessary. My own proposals would recognize the essential-but no longer determinant-role which national gold holdings will inevitably retain in our international monetary system for some years to come. All that is needed, and negotiable, at this stage is to agree on those initial steps which are indispensable to meet present-day problems and to reopen the door to the evolutionary process that will gradually improve man's control over this crucial basis of his economic life in an increasingly interdependent world.

[i] The so-called "band proposal" would enlarge the margin between official buying and selling rates, leaving market rates free to fluctuate around a stable middle rate, or par-value. The "crawling peg" proposal would allow the par-value of a currency to depreciate or appreciate, in accordance with market forces, but by no more than 2 or 3 percent per year. The "crawling band" proponents would merge these two proposals, by allowing an enlarged band around a "crawling" par-value. Others would retain the façade of stable rates, but favor special tax and subsidy provisions tantamount to exchange-rate flexibility for merchandise imports and exports.

[ii] In 1913 currency and deposits already accounted for about 85 percent of world money stocks, gold for only 10 percent and silver for 5 percent.

[iii] The quotation is from Robert V. Roosa, "Assuring the Free World's Liquidity," Business Review, Federal Reserve Bank of Philadelphia, September 1962, reproduced in "The Dollar and World Liquidity," New York: Random House, 1967, p. 102.

[iv] Contrary to Mr. Rueff's expectations, a straight devaluation might, as it did after the dollar devaluation of 1934, give a new breath of life to the dying gold-exchange standard, while a fluctuating dollar price of gold might impel most other countries to accept, at least temporarily, a dollar- area status rather than face the competitive handicap that would result for their industries from an appreciation of their currency in terms of the dollar and of the other currencies that kept stability with it.

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