China’s Immunity Gap
The Zero-COVID Strategy Leaves the Country Vulnerable to an Omicron Tsunami
PUBLICATION in April by the American and British Treasuries of plans for monetary stabilization after the war has launched a debate that will continue until a decision has been reached. This is a fine example of the democratic process. Both Treasuries have emphasized the tentative character of the proposals and have invited comment from any quarter. The plans have been announced as the work of technical experts. Dr. Harry D. White, Director of the Division of Monetary Research of the Treasury, is the author of the American plan and Lord Keynes, now serving as an adviser of the British Treasury, the author of the British plan. The discussions thus far both between the two Governments and with the other allied and associated governments have been entirely through the medium of technical experts. The Governments themselves remain uncommitted. Although the American plan has been presented by Secretary Morgenthau to the appropriate committees of Congress and there has already been some preliminary discussion of both plans in the British Parliament, it seems probable that the legislative phase of the debate will not get seriously under way for some time. At the appropriate stage, presumably, public hearings will be conducted by our Congressional committees.
All this contrasts most favorably with our lack of planning for monetary stability after the last war and gives ground for hoping that we may avoid another long period of currency demoralization. The world's monetary experiences in the period between the two wars are too familiar to require more than the briefest summary. The suspension in 1919 of the measures taken during the war to peg sterling and other currencies revealed fully the breakdown of the international gold standard which the war had produced and introduced a period of the wildest currency disorder. Depreciation of European currencies, combined with the general political and economic uncertainty, led to those erratic flights of capital which throughout the inter-war period continued to be perhaps the chief impediment to the establishment of international monetary stability. The disorder of the early twenties was marked especially by the great inflation which ended in the complete destruction of the German and other currencies of Central and Eastern Europe and by the slower and milder inflation in France, Belgium and Italy.
Following this initial phase after the last war, the leading countries adopted monetary policies directed toward bringing their currencies back to gold. The British stabilized the pound at prewar gold parity and the French Government stabilized the franc at a depreciated rate. Among economists the opinion prevailed that the pound had been overvalued and the franc undervalued. The result was that England was subject to a constant hazard of losing gold, which up to the time of her departure from the gold standard in 1931 continued to dominate both her external and internal economic policies. France, on the other hand, continued for several years to draw gold persistently from other countries and exert deflationary pressure upon them.
England's predicament, in particular, gave rise to a prolonged and often very warm debate about who was mainly responsible for the currency disorder existing in the world. The British economists reproached this country not only for its tariff policy -- a criticism with which I heartily agree -- but also for its unwillingness or inability to have our internal prices rise, with the result, as Keynes put it, that the world's gold was being buried in the vaults of Washington. Americans, on the other hand, were more inclined to stress England's failure to reduce her costs, which, as they pointed out, was the logical implication of her decision, independently taken, to overvalue the pound. As we look back now and recognize that we then were in the early phases of our great boom which led to the crash of 1929, the English reproach seems pointless. Nevertheless, it is typical of the kind of conflict in points of view that arises when fundamental decisions about exchange stabilization are taken by countries independently rather than by joint agreement.
The British and French difficulties in the twenties and the new general collapse of the gold standard during the great depression led to an increasing insistence by many economists that a system of fixed exchanges was neither feasible nor desirable under modern conditions. Trying to maintain external monetary stability, they insisted, meant sacrificing internal stability; nations were forced to choose, they said, between stable exchanges and stable internal prices, incomes and employment. Lord Keynes, it will be recalled, was in the forefront of this advocacy of flexible exchanges and launched many a dart against the tyrannical interference of the gold standard with internal economic and monetary policies.
Both the Keynes and the White plans give abundant evidence that the experiences of the inter-war period have been carefully pondered. What they come out with is essentially a compromise of earlier ideas, but a compromise looking fundamentally toward a stable exchange system. Both recognize the necessity of controlling short-term capital movements and to this extent depart from the assumptions of a free exchange system. Both recognize the necessity for international coöperation in determining exchange rates, and both provide machinery for altering exchange rates under appropriate circumstances. Both recognize clearly, however, the destructive effects upon international trade, and economic relations generally, of freely flexible exchanges, and have as their chief purpose the creation and maintenance of a system of stable exchange rates. I have believed for some years that the solution of the international monetary problem must be sought along lines of compromise such as these,[i] and I regard this aspect of the plans as a great constructive step forward.
Publication of the two plans has given rise, not unnaturally, to much comparison of them with each other and of both with the gold standard. Reading the comment here and abroad, I have felt that too much was being made of the differences and not enough of the similarities. Probably this is why shortly after the plans were published British officials in Washington gave a press interview in which they emphasized how much more fundamental is the general similarity in the nature and purposes of the two plans than the many differences in their detailed provisions. But I have been even more concerned by the comparisons between the two plans and the gold standard. Some strong adherents of the gold standard appear already to have brushed both plans aside on the simple ground, often unelaborated, that they think the gold standard system is better. Others seem inclined to reject both on the ground that they go too far in providing a link between national currencies and gold. There appear to be many in this country who prefer the White plan primarily on the ground that it represents less of a departure from the gold standard; while in England many appear to prefer the Keynes plan as less tied to gold. At least this seems to have been the drift of the comment in the Parliamentary debate on May 12, and much the same thing has been said in various articles in the English financial press.
In all this there is much danger of confusion. Not only are the two plans fundamentally similar in their mechanical aspects but the monetary mechanism provided in both is essentially a gold standard mechanism. This is a major fact which must be grasped at the outset. It depends not at all upon the references to gold made in either plan.
The White plan provides for an international stabilization fund. The member countries would deposit their currencies with the fund,[ii] which would then undertake to provide the currencies needed by each country for settling its international account. The Keynes plan provides for an international clearing union in which no funds are deposited. Instead, international payment would be effected by debiting the paying country and crediting the receiving country on the books of the union. Both plans provide for a new international monetary unit in terms of which the national currencies of the member countries would be defined. In the Keynes plan the new unit would be called the bancor and in the White plan the unitas. These new monetary units, however, are quite unimportant and serve no purpose other than to provide a common unit of account.
This mechanical difference between the two plans is that between the bank deposit principle as we know and use it in this country and the overdraft principle as used in British banking. I suspect that in the actual working of the plans it might prove to be a difference of considerable practical importance. The use of the overdraft method would mean that the clearing union would engage in no exchange operations itself but merely keep books.[iii] It lends itself beautifully, moreover, to the function of clearing only the net balances in each country's aggregate trade with all the others combined, which is the essential requirement of an effective international monetary mechanism. On the other hand, its very simplicity might be a weakness from the stand-point of the magnitude of the new foreign exchange facilities which might be created under the plan. It might well seem to many of the member countries like getting something for nothing, since nothing has to be put up, and there might easily develop a strong urge for bigger and better quotas all round. I will come back later to what this might mean for the American banking system in the very probable event of a strong convergence of demand upon the dollar.
But as regards comparison with the gold standard, this mechanical difference between a stabilization fund and a clearing union is of no importance. As I said earlier, both are essentially gold standard plans. This can best be seen by a point-by-point comparison. The gold standard method of maintaining international equilibrium breaks down into four parts: (1) exchange rates are fixed by defining each currency as a weight of gold; (2) small variations in exchange rates, sufficient to cover the cost of shipping gold, cause gold movements between the trading countries; (3) the gold movements reduce the bank reserves of the gold-losing countries and increase the reserves of the gold-receiving countries; (4) these variations in bank reserves are supposed to produce changes in the money supply,[iv] and thus in the internal prices and incomes of the trading countries, which correct the original disturbances in the balance of payments that gave rise to the gold flow. This at any rate is the familiar sequence of steps as taught us by Ricardo and Mill. Comparing this with the money mechanisms provided by the Keynes and White plans, we see that the differences are in matters of detail, rather than of essence: (1) in both plans, the currencies are fixed, not in relation to gold, but in relation to each other through being defined in terms of a common unit of account, the bancor or the unitas; (2) gold movement[v] is unnecessary but its function is preserved and performed by currency transfers in the fund or by transfers of debit and credit on the books of the clearing union; (3) these transfers in the fund or the union affect bank reserves in precisely the same manner as the movement of gold under the gold standard; (4) variations in bank reserves are expected to have the same monetary and price effects as under the gold standard, but these effects may be modified by the powers of adjustment assigned in both plans to the international board of directors of the fund or the union.
This comparison will have served its purpose if it brings out clearly that the similarity of both plans with the gold standard depends on their effects upon bank reserves and deposits rather than on what they actually say about gold.[vi] Space is too limited for much discussion of the gold provisions. I have the general impression that the White plan seeks to preserve as much as possible the previous rôle of gold. Member countries are required to put up part of their deposit in gold, and the fund is permitted to buy, sell and hold gold. The plan apparently contemplates that all transactions by parties that have gold or exchange balances may be consummated outside the fund but within the rate range fixed by the fund. The Keynes plan also makes rather generous provision for gold. The clearing union is empowered to buy and hold gold and may, at its own option, distribute its gold to creditor countries. One can read fairly readily between the lines that these provisions are due not to any great concern about gold on Keynes' part but most likely to his recognition of the political requirements of getting his plan accepted. With the British Empire the principal producer of gold, and the United States the principal holder, it is not likely that any plan which does not provide a market and a monetary use for gold will be acceptable in either country.
But the question raised in my mind, and which I have not yet been able to resolve, is whether in actual experience with the plans we might not find the world developing a dual monetary system, some countries working through the fund or the union and others working around it. Whether this would help or hamper the achievement of a general monetary stabilization seems to me not an easy question to answer. Would the fund or the union be preserved for dealing, without impairment of effectiveness, with those situations for which it was really needed, while permitting international settlement to go on wherever feasible through accustomed channels? Should one take the view, as one expert has said of the White plan, that the less business the fund has to do, the more successful it will have been? Keynes has said that "By supplying an automatic means for settling some part of the favorable balances of the creditor countries, the current gold production of the world and the remnant of gold reserves held outside the United States [amounting, I might interject, to over $11 billion] may still have a useful part to play," and that he sees no reason why sterling area arrangements or dollar bloc arrangements should not be continued. Are such statements to be taken to mean that he too feels that the less work his union has to do the more successful it will have been?
One of the great weaknesses of international organizations heretofore, whether political or economic, has been that countries have found both the motives and the means to avoid using them and to escape the pressures which they were intended to exert. Whether in their provisions about gold both plans may not have opened the way to their own eventual undoing is a question that deserves the most careful exploration.
If, then, the Keynes and White plans are essentially variants of the gold standard system, what are the reasons for proposing these particular variants at the present time? And are there any other proposals that deserve equally careful exploration before decisions about postwar monetary stabilization are finally reached? As to the first question, it seems to me that the case for these particular proposals, or some compromise between them, rests mainly on two grounds: (1) the inadequacy and mal-distribution of the present supplies of gold and foreign exchange balances outside the United States; and (2) the scheme for collaboration and control which heads up in the management of the fund or union by an international governing body. The first of these reasons has a special bearing upon the immediate postwar period and the problems of transition from war to peace. The second looks as well to the kind of monetary organization which will be needed after the return to a more normal world.
Toward the provision of more ample and better distributed foreign exchange resources, the White plan makes only a moderate contribution.[vii] It calls for a fund of $5 billion, of which it is expected the United States would provide $2 billion, and a fourth of the total would be in gold. It is contemplated that only half of the national quotas would be called up at the outset. For blocked war balances, however, which might well be a particularly severe source of disturbance, especially for England, the White plan provides for a gradual liquidation to be spread over twenty-three years. The Keynes plan, on the other hand, suggests that the initial national quotas "might be fixed by reference to the sum of each country's exports and imports on the average of (say) the three prewar years, and might be (say) 75 percent of this amount." And it has been estimated that the new foreign exchange resources which could thus be created through the clearing union would amount to $30 billion, of which $25 billion would be credited to countries other than the United States. To this should be added about $11 billion of gold held outside this country, plus nearly $1 billion of official dollar balances now held by foreign countries with the Federal Reserve System. Looking ahead for the next five years, which might cover the remainder of the war and the transition back to peace, we should also include the output of new gold, which amounts to more than $1 billion a year. Thus, under the Keynes plan, there might be available a maximum of official gold and foreign exchange resources held outside this country of over $40 billion.
Whether so generous a provision of exchange resources would be a good or a bad policy for the postwar period is a debatable question. Keynes insists on the desirability of starting the nations off on a wave of expansion sufficient to overcome any fears that might hold them back from trading and producing courageously and freely. One might sympathize with this and still doubt the wisdom of providing so much leeway. So far as the United States is concerned -- and particularly if the expansion took the form of a concentrated demand for dollars, as in all probability it would -- one would need to ask whether it is wise to encourage such an expansion of bank reserves and bank deposits as would ensue, and on top of the doubling and more likely the trebling of our money supply which is resulting from our financing of the war. This would be to recreate our problem of gold inflow and excess reserves of the thirties with a vengeance.
We can only speculate how real such a danger might be. According to the Keynes plan, penalties on debtor countries should begin to operate well before their quotas are reached; and there are of course the provisions which he outlines for corrective actions to be taken by the creditor country, which he speaks of as a unique feature of his plan but which in the end he leaves, so far as I can see, to the discretion of the creditor country itself. But it is always easier to mention these corrective measures than to decide in the concrete case what might or should be done. A pronounced monetary expansion in this country would almost certainly not be the right move. Foreign investment would certainly be in order and probably tariff reduction, but both would take time. Whether currency appreciation would be a possibility is a hard question. It would seem feasible, if ever, under the conditions of a boom such as we may well have. But whether our farm bloc, for example, would ever consent to it under any circumstances is problematical. At any rate, it would seem prudent for this country not to confront itself with too large a question of this character too soon.
This is part of a larger question of interest not only to the United States. Keynes barely alludes at one point to the possibility that the world may be confronted during the transition from war to peace with an excess of purchasing power and a deficiency of peacetime goods, so that for a period, at any rate, a policy of monetary expansion might carry more promise of inflation than of increased real income and employment. This, it seems to me, is a real possibility, deserving of much more than a passing reference. Most economists seem now to be agreed that because of this danger of postwar inflation, which seems even more serious than the threat of wartime inflation, it will be necessary to maintain, and to relax only gradually and carefully, most of our internal direct controls. And this is the policy which I would prefer to follow externally as well.
Fortunately for the longer run prospect of international monetary stability, the nations will come out of this war with well developed systems of exchange control. Retention of these controls, and only gradual relaxation of them, coupled with specific provision for relief and reconstruction expenditures by the extension of the lend-lease arrangement and with some special plan for handling the blocked war balances, would seem to me the preferable way for dealing with the transition to a more normal world. On this ground I would prefer to see the institution of such plans as those proposed by Keynes and White deferred. If I had to choose between them, I would favor the White plan, so far as this aspect of the problem is concerned. With the past record of international coöperation what it has been, special thought should be given to the dangers of launching too ambitious a project prematurely, under conditions which might discredit it unnecessarily in its early years. This is particularly the case if, as I have said, the problem of transition to more normal conditions might be handled as well or better by other means.
The most important question, however, is whether in the longer run, when the transition to peace has been achieved, the general type of monetary organization outlined in the Keynes and White plans promises to give the best assurance of achieving and maintaining international currency stability, with all that implies for a stable and orderly economic world. This, too, I do not find an easy question, and my present attitude is one of wanting to hear more and think more about it as the debate develops. One of the dangers involved in the present technique of concentrating upon the comparison of the two plans, and taking the visiting experts of the allied and associated governments through them point by point, is that no other plan is likely to get an adequate hearing -- unless it be later on, at the legislative stage, which may not be the best method of arriving at well and calmly reasoned conclusions.
The difficulty for me is that I have long believed that there is another kind of approach to the problem, and one that deserves equally well the name of international collaboration even though it is constructed on less elaborate lines. This is what might be called the key countries, or central countries, approach to the problem.[viii] It is closer in conception than either the Keynes or White plan to the way the gold standard actually worked, around England as the central country, in the nineteenth century; whereas I have the feeling that those plans have a closer family relationship with what might be called the textbook type of gold standard, which implied that monetary stability was maintained by the compensatory action of a large number of countries of equal economic weight. What I call the key countries approach to monetary stabilization could be tried with or without an international governing board, though I think this is not the main point of difference between the two ways of going at the problem.
The main difference is in the conception of how trade and finance are organized in the world, and of the importance of stabilizing the truly international currencies whose behavior dominates and determines what happens to all the others. Though the organization of trade and finance has undergone much change since the nineteenth century, it still seems true that stabilization of the leading currencies with reference to each other, combined with coöperation among the countries concerned for the promotion of their own internal stability, would be the best foundation for monetary and economic stability throughout the world.
The importance of coöperation upon internal as well as external monetary and economic policies in the leading countries is in line with the current of thought among economists in recent years. One of the most interesting points in Keynes' White Paper is the lightness of touch with which he deals with internal policies. "There should be the least possible interference with internal national policies, and the plan should not wander from the international terrain. Since such policies may have important repercussions on international relations they cannot be left out of account. Nevertheless, in the realm of internal policy, the authority of the governing board of the proposed institution should be limited to recommendations, or, at most, to imposing conditions for more extended enjoyment of the facilities which the institution offers." As I read over his provisions as to what debtor countries may be required to do to adjust their position as their net debit balances mount from a quarter to a half to three-fourths of their quotas, I am not overly convinced that the board's powers of control have very strong or sharp teeth. On exceeding a quarter of its quota on the average for two years, the debtor country may depreciate its currency up to 5 percent. On reaching a half of its quota, it may be required to deposit collateral. As a condition of exceeding a half of its quota, it may be required to do all or any of the following at the governing board's discretion: reduce the value of its currency; control outward capital movements; and/or surrender a suitable proportion of any separate gold or other liquid reserve in reduction of its debit balance. It is at this point that the governing board may "recommend . . . any internal measures . . . which may appear to be appropriate." On exceeding three-fourths of its quota, the debtor country "may, in addition, be asked by the governing board to take measures to improve its position, and, in the event of its failing to reduce its debit balance accordingly within two years" may be declared in default and no longer entitled to draw against its account.
All of these measures seem desirable. In particular, I have long believed that the younger countries, whose economic conditions primarily reflect the conditions existing in the great world markets, for which they are only secondarily responsible, should be permitted to vary their currencies. It might help them somewhat, without too seriously affecting the larger countries. Such countries do not often have major difficulties arising out of the outward movement of capital; for them the exchange problem is usually presented by the stoppage of the inward movement. When this happens, they are not unacquainted with being declared in default. The same circumstances which stop capital inflow restrict the markets for their products and produce a severe shrinkage in the value of their merchandise exports, so that these countries are frequently unable to maintain interest payments or even to pay for their current imports. The classical economists would have insisted upon internal reduction of their costs; and some countries, like Australia in the great depression, have proved that internal cost reductions can be a feasible and a potent method of adjustment of the international position.[ix] But, broadly speaking, the whole experience of the inter-war period proved nothing more clearly than the fact that the economic condition and the balance of payments position of these countries are primarily a reflection of the conditions in the larger countries, and that if those conditions are bad enough, there can be no real escape, even though the countries are driven -- as most of them were -- to exchange control as a desperate last resort.
From this experience of the inter-war period, I come back always to the conclusion that the problem of international monetary stability is primarily that of maintaining a state of proper economic health in the leading countries; and that this is the only workable answer to the whole conflict between internal and external monetary stability, about which discussions of the gold standard for years revolved.[x] This means collaboration to maintain both a high level of real income within the leading countries and a high degree of exchange stability between them. If this could be done, the problem of maintaining exchange stability for the other countries, and a reasonable state of economic wellbeing within them, would probably not present major difficulties.
But such a program implies a degree of coöperation among the leading countries which goes far beyond what is outlined for the governing bodies in either the Keynes or the White plan. I doubt whether the requirements could be spelled out at present, or even whether it would be wise to try to do so. But I heartily agree with Herbert Feis when he says in his article in the April number of FOREIGN AFFAIRS that the best augury for success lies in the intimate collaboration upon numerous problems which has already been developed between this country and the British Empire in our conduct of the war.
Between the two approaches to the problem of monetary stabilization which I have discussed, the Keynes or the White proposal on the one hand and the closer collaboration among leading countries on the other, there may be no inherent or fundamental disagreement. A French plan of the kind I have suggested was prepared prior to the release of the British and American plans and has since been published in the New York Times.[xi] One of the reasons advanced in favor of it by the authors was that it could be put into effect promptly, whereas in their judgment "If the international monetary system is so ambitious that it cannot become of general use until political and economic conditions are peacefully settled in the whole world, it may have to wait a long while." It might be more feasible to start with a scheme embracing fewer countries, which is less ambitious only in the sense that it is less extensive and more ambitious in the degree of coöperation contemplated, and tie in other countries as conditions warrant. This was the method followed in the Tripartite Agreement of 1936. I am not suggesting that agreement as the model, however, unless it can be greatly strengthened in its provisions for external collaboration and supplemented by provisions for coöperation on internal policies, to which it made no reference. There might be many advantages in such a piecemeal procedure. We could start, for example, with plans for stabilizing the dollar-sterling rate and for measures of coöperation on internal policy, while postponing until later the many difficult questions about the relation of sterling and the dollar to the European currencies which cannot conceivably be settled, I think, except after a period of European reconstruction.
Since I have dealt here exclusively with the proposals for currency stabilization, I should say in conclusion that monetary mechanics is only the lesser part of the problem, as the authors of the plans discussed fully recognize. Keynes begins his White Paper by suggesting four main lines of approach to the problem of how to achieve a stable and prosperous world, of which the mechanism of currency and exchange is only one. The others are international commercial policy; orderly conduct of production, distribution and price of primary products; and investment aid, both medium and long-term, for countries whose economic development needs assistance from the outside. Work is going forward on these other lines of approach, and upon the success of this work will depend fundamentally the success of our efforts, by whatever plan, to achieve international monetary stability. In all phases of it the United States has a vital interest and carries a unique responsibility. This will be the leading and probably the only important creditor country after the war. If we are to have an orderly and stable world, our responsibilities must not be shirked. But our rôle being what it is, and must be, we owe it to ourselves and to the rest of the world to think through the problems with all the intelligence and care and breadth of outlook of which we are capable.
[i] See my paper, "The Adequacy of Existing Currency Mechanisms under Varying Circumstances," American Economic Review, March 1937, Supl., p. 151-168.
[ii] The initial deposits are to be made one-fourth in national currency, one-fourth in gold, and one-half in government securities; but for my present purpose these details are secondary.
[iii] The stabilization fund, on the other hand, would engage in operations, but only with central banks or other designated fiscal agencies
[iv] I need not elaborate the familiar primary and secondary effects on the money supply, the one-for-one increase of deposits accompanying gold inflow and the multiple expansion of deposits supposed to follow the increase of reserves. Both are present also in the Keynes and White plans.
[v] But see my next paragraph which discusses the gold provisions. As stated earlier in the text, my point in this paragraph is that the mechanisms of the plans would be gold standard even though there were no provisions about gold.
[vi] In the press comment, much importance seems to be attached to the fact that the unitas is given a fixed value ($10) in gold, whereas the gold value of the bancor could be varied. It is evidently felt that this is to be England's way of retaining the variable price of gold which she has had since 1931. But this is clearly a misunderstanding. England's variable price of gold was in terms of sterling and gave her a means of varying her exchange rate relative to countries where the price of gold was fixed. Under the Keynes and White plans, however, all currencies will be fixed in terms of the bancor or the unitas and cannot be changed, except with the consent of the Governing Board. A variable price of gold in terms of bancor would not affect exchange rates but could be a means of controlling the price, and thus the production, of gold vis-à-vis all currencies.
[vii] It is true, however, that provision is made for the expansion of the fund's gold and exchange resources if this is thought desirable.
[viii] See again my paper, "The Adequacy of Existing Currency Mechanisms under Varying Circumstances," American Economic Review, March 1937, Supl., p. 151-168.
[ix] Australia also depreciated her currency and adopted expansive monetary and fiscal policies.
[x] See my paper, "The World's Monetary Dilemma -- Internal Versus External Monetary Stability," Proceedings of the Academy of Political Science, April 1934, p. 62-68.
[xi] The New York Times, May 9, 1943, p. 5. The plan was prepared by André Istel, former financial adviser to the Reynaud Ministry and one of the negotiators of the Franco-British Financial Agreement of 1939, and Hervé Alphand, former financial attaché in Washington, former head of Trade Agreements in the French Ministry of Commerce, and French representative at the International Food Conference at Hot Springs.