Sacrificing His Core Supporters in a Race Against Defeat
PROBABLY no subject provokes more divergent opinions than that of the future stabilization of currencies. Each country necessarily considers it from its own peculiar standpoint; and even within a particular country there is usually a great divergence of views with regard to the method and the time for reëstablishing some kind of international standard. I shall attempt here to present the present British view with regard to the desirability of stabilization, as well as the method to be employed and the time when it should be initiated. Though the view I emphasize is the British one, I think it fair to point out that because of London's long participation in international finance it does endeavor, though not always with success, to take something more than an insular view of these matters.
Some British authorities consider the present moment ripe for international stabilization, and among these are some who insist Great Britain should promptly take a strong lead. Yet I cannot help thinking that those who dogmatize on this question do not take sufficient account of the events of the past twenty years which have led to the present monetary situation. Before we consider the question of why, how, and when there should be a stabilization of international currencies, it is desirable that we obtain a clear view of some of the changes which have resulted from the World War.
Before 1914 the currencies of most countries were established upon the gold standard. But Great Britain and the United States, with their free gold markets, were probably alone in fulfilling all the requirements for the smooth working of an international gold standard. Both countries were dominant in their respective spheres. Great Britain, by reason of her outstanding position as a leading creditor country and as the banker of the world, was able to maintain her position with comparatively small holdings of gold. The United States in some respects was in a less favored position and at periods was actually financed by Great Britain. Nevertheless, her natural resources and her favorable visible trade balance were so great that even when circumstances occasionally led to heavy losses of gold her exports of goods and services quickly rectified the position.
Furthermore, before 1914 the functioning of the international gold standard was facilitated by something approaching an equilibrium in the trade of the various countries. From time to time the balance against a particular country would be sufficiently pronounced to cause a considerable efflux of gold, but this movement would quickly readjust the exchange position, since the receiving country allowed the incoming gold to function in normal fashion. These were the days when Great Britain, as banker for the world, was constantly making foreign loans to the mutual advantage of lender and borrower, and these loans undoubtedly stimulated both British and international trade.
I wish to emphasize the fact that before the war Great Britain could impose the effectiveness of the gold standard upon the world, because this fact has an important bearing upon future plans for stabilization. That power had developed during almost a century of trade activity and foreign lending which enabled Great Britain almost at any time to control exchange movements through the bank rate. Even before 1914, however, there were signs of some slight diminution in this financial supremacy, since Great Britain no longer enjoyed her former advantages in export trade. Germany and other countries had become keen competitors. Nevertheless, Great Britain's power was not seriously impaired, and at the beginning of the war her financial hold over other countries was indicated by the rush of debtor countries to make remittances to London and the consequent fall of New York exchange to an unprecedented discount in terms of sterling.
It is important likewise to remember that prior to 1914, even though the British and the United States Governments had the final word in banking legislation, the banks were not rigidly controlled by their governments and by reason of their position as custodians of liquid wealth were able to dominate monetary and financial policies.
How great a change was wrought in these conditions by the World War has not even yet been fully realized or understood. Were it otherwise, we should have had more intelligent action on the part of all countries concerned. By reason of profits obtained during the war and the terms on which the Allies were financed during 1917-1919, the United States changed from a debtor into the world's leading creditor. Per contra Great Britain, after parting with most of her gold to the United States during the war and selling her American securities, became a debtor country. This change was further emphasized later on by numerous defaults on her holdings of foreign loans.
Neither country, however, appeared for some time to realize the tremendous changes brought about by the war. The British Government was slow to economize, and the British people, misled to some extent by politicians, were so slow to perceive their new position as a debtor country and the inability of European countries to pay high prices for manufactures, that they did not attempt to meet the situation by cheapened production but demanded instead shorter hours and improved standards of living. The evils resulting from this failure of debtor countries to realize their new position were intensified by the failure of the United States to understand her responsibilities as a creditor.
Every nation made the mistake of supposing that there would be an early recovery of prosperity. The United States, misled no doubt by the artificial war prosperity, made the greatest mistake of all. This observation is not made in any moral or ethical sense. It is always easy on looking back to perceive mistakes not easily discernible at the time, but it is necessary to recognize them clearly today, because they affect so vitally the question of international stabilization of currencies.
It was common knowledge, soon after the war, that America had laid Europe under tribute and that the amount involved was colossal. The vast lending power of Great Britain had passed to the United States. There was a passing realization of this fact in America, but unfortunately it was expressed in a spasm of lending in directions which involved heavy losses to American investors. It is not altogether surprising that after the United States had built up her prosperity behind tariff walls she should refuse to acknowledge that the payment of her debt claims on Europe could be made only in the form of goods and services. The task set before the European debtors was akin to that set before the Israelites of old when they were told to make bricks without straw. But perhaps, also like the Israelites of old, the debtor nations might have attempted more in the shape of hard work to meet the situation. How this misreading of developments by the United States was destined to create embarrassment and how it finally culminated in a record crisis is now a matter of common knowledge. I shall reserve comment upon the fiscal policy of President Roosevelt's régime until I reach the pivotal questions involved in any international currency stabilization.
One other great change arising out of the war calls for special attention. Financial power and financial initiative have passed very largely from bankers and industrialists to governments. In Great Britain it is not so much a case of the Government or the Treasury endeavoring to dominate monetary policy through interference by the Bank of England, but rather of their possessing that power quite naturally through the magnitude of their financial operations. The state of international trade following upon the war reduced the bill of exchange to a trifling total when compared with the pre-war days. That circumstance in itself gives the government almost unlimited power to influence the course of money rates and monetary policy. In the United States I imagine that much the same conditions prevail, though of course under the Roosevelt régime there has been a more definite grasping of power by the government.
But whatever the causes, and however much they may vary in different countries, the fact remains that governments today possess vastly more power to dominate monetary and economic conditions than they did before 1914. And with the growth of democracy there is a greater demand by the people that this power be freely used. These two circumstances, I think, go far to explain why during periods of depression politicians and statesmen have not lent a ready ear to those economists who maintain that depressions can be cured by the old process of increased and cheapened production, involving for a time somewhat lower standards of living.
Always keeping in mind the fundamental changes which have taken place since international gold standards were in real working order some twenty years ago, I shall now endeavor to set forth the British view: (1) as to the desirability of a stabilization of currencies; (2) how such stabilization is to be accomplished; and (3) when it may be accomplished.
If a consensus of opinion were taken at the moment in this country with regard to the desirability of an ultimate return by the nations to a gold standard there would be an overwhelming vote in banking circles and a less decisive vote from industry in favor of a return. On the questions of "how" and "when" opinions would vary greatly.
Why is the feeling so general in Great Britain that an ultimate return to an international gold standard is desirable? It might fairly be argued that Great Britain is not doing so badly under present conditions. Her domestic trade has improved considerably during the last eighteen months, and the increase in iron and steel production has been remarkable. I do not think, however, that either bankers or industrialists are misled as to the limitations of this improvement. Possibly because we have acted for many generations both as bankers and suppliers of industrial manufactures to numerous countries, we have an instinctive belief in the doctrine that no prosperity can be extensive or enduring which is not more or less world-wide in character. Rightly or wrongly, we believe that world-wide expansion in trade is impossible under conditions producing the maximum amount of chaos in the foreign exchanges, which represent international currency.
In the second place, we believe that the present chaos in the exchanges is a deterrent to world trade not merely because of the chaos itself, but also because of the tendency of certain nations to regard the manipulation of the exchanges as something akin to protective tariffs. While tariffs may be barriers to international trade, they can be softened through trade agreements, but currencies based upon an international gold standard have a more enduring character and tend to produce confidence in trading between the nations.
At the present moment the gold-bloc countries are suffering most acutely from the chaotic state of the exchanges. They are suffering all the more because the devaluation of the dollar and other measures of inflation in the United States have not caused American prices and costs of production to rise sufficiently to offset the adverse effect of the appreciation in the exchange value of their currencies. It is also fully recognized here that without a revival in world trade the expansion in our home trade cannot go far enough adequately to relieve the problem of unemployment.
Many readers of FOREIGN AFFAIRS are probably familiar with a recent article by Sir Henry Strakosch[i] in which a return to gold is advocated as the most important step to be taken -- and one that should be taken quickly -- toward world recovery. Sir Henry furnishes statistics showing that in recent years commodity prices in the sterling area have been much steadier than those in the gold-bloc countries, where prices have tended to fall. Other statistics show that production as well as the price level has been adversely affected in the gold-bloc countries. Quite wisely, however, Sir Henry does not labor his argument to the point of maintaining that the countries in the sterling area whose prices have remained comparatively steady should not find it to their ultimate advantage to return to an international gold standard.
It is firmly believed in British financial and business circles that a return to a carefully considered international gold standard is the best safeguard against manipulated currencies and monetary policies of government which may be influenced from sources unable to comprehend the financial and social benefits of a stable money. This feeling is becoming stronger by reason of the growing power of governments in the field of finance, a development to which I have already called attention.
Finally, it is believed here that the danger from manipulated currencies has been increased by the recent tendency of governments to regard depreciated currencies as a trade weapon.
While there may be a general desire to return some day to an international gold standard, a consideration of "how" and "when" reveals obstacles which may interfere with the consummation of this desire. There are several methods which might be employed for a return to an international gold standard. In the first place, a conference of all the leading nations might be called to discuss the problem. Unless, however, such a conference is called by the United States, I do not think that one will be held in the near future. In view of what happened at the World Economic Conference in London, called by this country under circumstances implying the closest cooperation of the United States, there is not a chance at present that our government will call another conference. President Roosevelt, after apparently favoring stabilization, turned down the preliminary agreement which had been reached at the crucial stage of the conference, and his manner of doing so made an indelible impression.
There may, of course, have been quite sufficient reasons for President Roosevelt's taking this course, but from that moment the movement in the direction of extreme economic nationalism gained headway, and it seems at present to be an effective bar to a conference in which international coöperation would be a first essential. It is conceivable that President Roosevelt might confidentially give our government assurances of his coöperation in the event of such a conference. But we are now fully aware of the fact that in these matters it is with Congress that the world has ultimately to reckon.
Secondly, it is possible that the countries in the sterling area, with a view to furthering trade, may draw closer together in an attempt to strengthen still further the present link between their exchanges. In some quarters this course is favored as possibly tending to accelerate America's desire for international coöperation. As one shrewd observer in the City has said, "America has still to make the important decision as to whether her policy is to be that of Internationalism or Nationalism, and in the latter case America may ultimately suffer more than she anticipates."
Another suggestion is that if it is impossible at present to obtain an agreement for an international gold standard, some tentative plan might be arranged to keep the dollar and the franc and the pound in more stable relations to each other. It is urged in some quarters that if President Roosevelt gave an undertaking that the dollar would not be further devalued for a given period, progress might be helped, and it might be possible in due course to arrive at the ratios to be permanently adopted by these three countries.
In default of any arrangement along these lines, the gold-bloc countries may abandon gold, thereby relieving themselves of influences at present making for acute trade depression. Such action at first would further intensify the chaos in the exchanges, but in the long run it might quicken the desire of all nations to come to an agreement.
In connection with these possible methods of returning to gold, I would again call attention to the all-important fact that Great Britain has lost her former power to enforce a gold standard upon other countries. Nevertheless, it is possible that close coöperation between countries in the sterling area might induce the gold-bloc countries in Europe to abandon gold and follow sterling, or cause the United States to make a move in the direction of a return to gold which might appeal to other nations.
Meanwhile, although Great Britain may not be in a position to enforce a gold standard upon the world, it is clearly within the power of the United States, either by a further devaluation of the dollar or by other methods, to render the trade position of the gold-bloc countries impossible, and to disturb the exchanges to such an extent as to quicken the desire of many nations for a return to stability. President Roosevelt's monetary policy was apparently designed in part to that end, but so far it has not produced the expected results. A well-known and practical authority on the foreign exchanges here has expressed the view that since the gold bloc will not tolerate any suggestions of devaluation of their currencies it is necessary for the value of the pound and the dollar to be increased in terms of, say, French francs. Says this authority:
If the pound and the dollar could be temporarily stabilized on the old parity of $4.86⅔ = £1 it might be possible to increase the value of the pound in France to 80 francs= £1 and the value of the dollar in that country to 16.4383 francs = $1. This would reduce the price of gold in London to 131s. 11d. per ounce fine and in the United States to $32.0972, the price in Paris remaining at its present level of 527.625 francs per ounce fine. A period during which these rates would hold good could be decided upon and, if found workable and in the general interests of domestic world trade, ultimately de jure stabilization could follow. Such action would remove the fear of further devaluation of the dollar and the pound and be of great assistance to the gold bloc of countries in removing the uncertainty that exists with regard to their currencies.
There are very few here, however, who believe that the time is ripe even for tentative experiments in stabilizing the pound until there has been a great change in the attitude of the United States towards the whole problem. And here we are at once brought up against the fact that while the greatest problem in that country has been the practical bankruptcy of the internal debtor, the American position as regards external obligations has been remarkably strong. In most European countries the problem is concerned mainly with external obligations.
Rightly or wrongly, the opinion prevails here that there can be no real return to an international gold standard. It is felt that the key to the situation is to be found in the United States. If, for example, it is true that the nationalist policy of America, as expressed in her high tariffs and a refusal to accept payment in goods and services from her debtors, was largely responsible (long before President Roosevelt came into office) for the world depression and the chaotic exchanges, that position has been made worse by the fact that in addition to the high tariffs we now have had the attempt on the part of America to pursue methods calculated to still further add to her gold hoards and to the chaos of the exchanges. And President Roosevelt's experiments are still at the stage when it is quite impossible to determine what will be their outcome.
Before there can be an intelligent international discussion of the general principles of stabilization and the ratios to be established between the major currencies, it is necessary to consider the possibilities of a greater equilibrium in international trade and the difficulties created by the stores of gold which have accumulated in the United States and France. Furthermore, a return to an international gold standard seems to be quite impracticable until the question of war debts has been settled. Countries such as Great Britain and France must know what are their final obligations in the matter of war debts to the United States, before calculations of the ratios under an international gold standard are practicable.
During the past year alone stores of gold in the United States, which were already stupendous, were increased by over £200,000,000, a far greater total than was represented by the entire gold reserves of the Bank of England in pre-war days. That the dollar has been enormously over-devalued by the 40 percent reduction in its gold content there can be little doubt. Hence the query of the authority I have already quoted is pertinent, when he asks why "the one currency that has been over-devalued -- thus making other currencies appear over-valued in terms of dollars -- should not be revalued and its gold content increased instead of expecting several other countries that have been able to remain faithful to the gold standard to devalue their currencies to create equilibrium with the United States dollar. The situation reminds one of the story of the old lady who saw her son marching by with his regiment and remarked, 'All out of step except our Jock.'" The United States, according to this same critic, deliberately moved the dollar out of line with world currencies and thus forced deflation of prices throughout the world.
While there is general agreement in London that the dollar has been undervalued and that American stores of gold are in excess of requirements, it is also recognized that if the monetary policy of the United States should eventually lead to gross inflation much of the gold may be needed as a backing against a huge expansion of credit. Moreover, it will easily be recognized that this problem of international stabilization cannot be divorced from the question of tariffs and other restrictions upon the international exchange of goods and services.
To speak very plainly, I think that the time for obtaining international coöperation for the reëstablishment of the gold standard will depend on the human element. If (I only say if) the policy of the United States throughout the post-war period has been one of extreme nationalism accompanied by misapprehension of world conditions and of the responsibilities of a creditor country, I am afraid that a certain amount of estrangement has resulted. And whether the subject is that of war debts or stabilization, the representatives of the United States seem unable to negotiate on equal terms with those of the other countries because of the power possessed by Congress. Again to speak quite frankly, that body appears to contain a large number who have never given much consideration to international problems.
Above and beyond all this, we in London feel that the Roosevelt experiment is only in its early stages. Opinion here seems to be equally divided between those who believe that by luck or skill America will pull through to conditions of real prosperity, and those who believe that the experiment will end in financial and social chaos, involving in some degree the whole world. Never was there a time when it was more difficult for America and Great Britain to come together over matters of vital concern, and yet there was never a moment when unity and coöperation between the two countries were more needed.
Of course, Great Britain herself has resorted in recent years to protective tariffs, but I think that the heaviest blows given to the free exchange of goods and services between different countries and also to the smooth working of an international gold standard have been given in recent years by the United States. I believe, therefore, that it is up to that country to take the lead in bringing about a reassembling of the nations for the good of all. This may savor of idealism, but I believe that the decision will have to be made by America. Possibly no country more earnestly desires a return to the gold standard than Great Britain, but as matters stand at present the risks are too great. She still has a reputation as an international monetary center which might be jeopardized by a return to the gold standard under present conditions. The dice would be loaded too heavily against her. The stability of an international gold standard will depend not merely upon the terms on which it is started, but upon the continuity with which the various nations "play the game."
I honestly believe that a few representatives of the United States Government and a few American bankers, coöperating with the same number of members of our Cabinet and of our banking community, could readily determine the principles to be adopted. But of course the less responsible and more numerous politicians have to be borne in mind. Unless there is a very strong and generous lead from the United States, covering trade and currency arrangements alike, we shall probably drift on for some time longer, but perhaps with a tendency towards increasing activity and stability in sterling exchange.
One thing is certain: if President Roosevelt and his advisers were shortly to attempt some plan for provisional stabilization of the pound, the franc and the dollar, there would have to be a definite undertaking that the dollar would not be further devalued over a certain period. And even this provisional scheme would have to provide for a higher valuation of the dollar in terms of other currencies than that now prevailing.
[i] Supplement to The Economist (London), January 5, 1935; Supplement to The Economic Forum (New York), Winter 1935.