THERE has been widespread debate in technical journals, and to some extent in the public press, of the international currency proposals put forward by the United States and British Treasuries and by the Canadian Finance Minister. By and large, however, the public generally has displayed relatively little interest in them. This is no doubt in part due to their technical nature; but it is also due to the sound insight of the public that good monetary arrangements, important as they are, cannot and do not insure the achievement of the economic goals that the public wants.

What are those goals? They are stability, and full employment with rising real income standards. We miserably failed to reach them in the two decades between World War I and World War II. In varying degrees in different countries throughout the western world we suffered violent price fluctuations, catastrophic movements in the level of income, prolonged intervals of mass unemployment, and very serious undermining of property values leading in some countries to widespread bankruptcy and in others to a serious deterioration of the middle class. We shall not succeed in establishing a secure political world following this war unless we solve our economic problems. High levels of employment and a high degree of economic stability are basic for the success of all other programs of international relations. They cannot be reached by letting things take their course. A positive program must be undertaken by all the leading countries together.

I believe there will be need in the postwar years for three new international economic institutions, one to take care of monetary stabilization, a second to expand international capital investment, and another for the control of prices of primary products.

The first institution, to provide for the international currency arrangement, though less important than the others, is necessary. A failure to provide satisfactory monetary arrangements could frustrate and defeat the other programs. It would be fatal (as the experience between the two wars abundantly shows) to return to a rigid and mechanical gold standard and to put forth as an end in itself the inflexible and rigid fixation of exchange rates. The monetary lessons of the last quarter century point, I think, to the conclusion that there should be no return to an international gold standard which automatically and directly acts as a regulatory mechanism. The control of the international monetary system which we hope will emerge after this war should be a conscious and rational one, carried out through international collaboration. A system of flexible yet substantially stable exchange rates can be realized within the framework of an expansionist program designed to promote full employment in the industrially advanced countries and to raise the productivity in the economically backward areas, and with institutions designed to minimize cyclical fluctuations. This should be the goal of the new international monetary arrangements.


My purpose here, however, is to describe the other two international institutions which seem to me necessary if we are to reach the two goals of stability and expansion. They are: (a) an International Development and Investment Bank; and (b) an International Commodity Corporation. The former could act continuously not only to promote economic stability but especially to promote development and expansion. The latter would be especially concerned with counter-cyclical policy, that is to say, with combating deflation or inflation.

In a previous issue of this review [i] I proposed an International R.F.C. Other suggestions along similar lines have since been published. The United States Treasury has made public a summary statement of guiding principles for a proposed United Nations Bank for Reconstruction and Development. The Bank is intended to encourage private financial agencies to provide longterm foreign capital investment, and to coöperate with and supplement private capital when such support is needed. According to the Treasury proposal, the Bank may guarantee loans made with private capital to any foreign member government and through such government to its political subdivisions and to business located in the foreign country in question. The Bank may participate in loans made with private capital or it may make loans out of its own resources, but only when the borrower is unable to secure private funds on reasonable terms. The payment of interest and principal on all loans which the Bank guarantees, participates in, or makes from its own funds must be fully guaranteed by the government of the borrowing country. The developmental project must be investigated and approved by a competent committee; the terms of the loan must be reasonable; and on guaranteed loans the Bank must be compensated for the risk assumed.

The proposals advanced in the following pages are a development of the idea expressed in embryonic form in my earlier paper. The major function of the International Development and Investment Bank, I feel, should be to provide funds for development projects and for capital outlays on equipment and plant necessary to develop the agriculture and industry of the economically backward areas. To achieve this, it is important to lay a sound basis for private capital lending and investment in foreign countries. This the Treasury proposal also stresses as a guiding principle. Under proper arrangements, the bulk of foreign capital investment should and can consist of private loans and investments. But, in addition, loans and investments should be made by the Bank itself in cases where private funds cannot and will not enter. Indeed, in the absence of basic developmental projects, financed by public funds, private investments in many cases could not be undertaken.

Private funds could be encouraged to go into foreign loans and investment by two types of procedures already made more or less familiar to us through the Federal Housing Administration. As is known, that body has proved extremely effective in directing the private investment funds of financial institutions such as life insurance companies, savings banks, and commercial banks into the private house mortgage field. Under the F.H.A. plan, the prospective individual home owner who is contemplating building a new house must supply 10 to 20 percent of the total investment as equity money; the remainder may be financed by mortgages insured and guaranteed by the F.H.A. The prospective owner engages to pay an arranged rate of interest, plus a service charge including an insurance premium. These insurance premium payments are pooled by the F.H.A. and serve as a first buffer to guarantee the mortgages held by the lending institutions. If this insurance pool should be exhausted in a serious deflation of the real estate market, the Federal Treasury engages to guarantee the mortgages. The owner of the mortgage is, however, required in the first instance to foreclose on the property; only if the foreclosure does not adequately protect his mortgage will the insurance and guarantee be utilized.

A similar procedure could be used in the international lending field. The International Development and Investment Bank could insure and guarantee the various loans, charging the borrower an insurance premium and a service charge in addition to interest. Such a program would go far to create confidence in foreign financial investment.

In addition, provision should also be made for the encouragement of equity investment. It has been suggested that the F.H.A. might well offer a yield insurance on the entire investment for large apartment house projects, in which case there would be no mortgages whatever. A life insurance company, for example, would erect a large apartment house and the F.H.A. would be authorized to insure the recovery of substantially all of the original investment and a minimum annual return of, say, 2 percent for a period of, say, 30 years. Such a provision would offer insurance companies a strong incentive to undertake large projects of this character. The company would, of course, anticipate and reasonably expect a return of perhaps 4 or 4.5 percent, but it might not feel inclined to undertake the venture at all without a minimum guarantee. Similarly, in the international field, equity capital could be induced to undertake large projects if a minimum guarantee were assured.

As already noted, however, the International Development and Investment Bank itself would have to undertake to make loans and participate in direct investment. This is necessary if foreign investment is to be undertaken on an adequate scale. Such loans and participations would be made for approved capital projects in foreign countries. The projects would be undertaken by the foreign government itself or by private industry guaranteed by it.

The funds thus provided by the International Development and Investment Bank could be raised in two ways. In considerable measure, doubtless, the bank would be in a position to issue guaranteed bonds in the various private capital markets of the world. A second source would be the Bank's own capital funds subscribed by the various participating governments.

The question may well be asked why there is any need for anything further than the insurance of private investment funds. The answer is that loans and investment by the Bank are necessary because many projects which deserve development cannot in fact earn sufficient returns to induce private investment. It does not follow that such development projects are economically unsound. In the first place, it may simply mean that certain basic development projects requiring a vast amount of fixed capital, such as electric power, river valley development, port facilities, and transportation facilities of different kinds, cannot be undertaken unless funds can be obtained at very low rates of interest. The Bank could sell guaranteed bonds in the private capital markets at lower rates of interest than would prevail for private or foreign country issues. Loans and investments which are feasible at a low rate of interest, therefore, could be financed by the device of guaranteed bonds of the International Development and Investment Bank.

In addition, however, I believe it is important to recognize -- and I must emphasize that I am stating merely my own personal views -- that many basic development projects are profitable and thoroughly sound economically, viewed from the standpoint of their effect upon the economy as a whole, even though they cannot return the principal plus the market rate of interest. They may even be sound should they fail to return any interest or the whole of the initial principal. It is generally agreed that the public investments thus far made in the Tennessee Valley and in the Columbia River Valley in the Pacific Northwest have profoundly influenced the economic development in those areas and will do so increasingly in the years to come. They have opened up new private investment outlets which would not have existed without the basic development by public funds. The effect of opening up private investment outlets, of increasing productivity and of raising income and purchasing power is such that the public outlays are thoroughly sound from the economic standpoint and may be considered highly profitable to the economy as a whole even though the Treasury does not get back one hundred cents on the dollar, or any interest at all. Indeed, it may well be that in the long run the Treasury will profit directly through the enlarged taxable capacity of the nation as a whole.

Precisely the same analysis applies, I believe, to basic development projects in the foreign field. It must be recognized, however, that the foreign government stands to gain from the favorable repercussions upon its own national economy flowing from these basic developments. It therefore is true that it should be able in most instances to guarantee the principal and a moderate rate of interest, even though the direct returns to it from the investment will be less than one hundred cents on the dollar. While this is true, it must not be overlooked that the International Development and Investment Bank might well share some of the loss of principal and interest with the foreign government in question. The member countries participating in the International Development and Investment Bank will indirectly benefit from these projects through the export stimulus which the foreign investment will provide; particularly would this be the case if such loans and investment were made in depression periods. Investment outlays of this low direct yield character would have to be made from the capital funds of the Bank itself.

If we are really going to achieve an expanding economy and provide full employment and higher income standards, I am convinced of the necessity of searching out development projects which, from the standpoint of a private business, would not yield satisfactory returns and hence could not be undertaken by private investment, but which nonetheless are profitable and sound from the standpoint of the economy as a whole. For such projects only public funds can be found. Only the government can take the larger view. Only it can take account of the induced and indirect repercussions upon the whole economy -- upon private investment outlets, productivity, employment and real income.

In the domestic sphere, public outlays need to be made in the area of urban re-development, river valley development, and transportation so that adequate new private investment outlets may be opened up. International investment outlets of a similar basic character would constitute important supplements to these internal development programs.

From the cyclical standpoint, the International Development and Investment Bank could act in a powerful manner to offset declines in private capital outlays in the leading industrial countries. At the onset of such a decline, the Bank should enter vigorously with development projects. It is especially in such periods that the Bank could afford to assume larger risks and, indeed, face the prospect of some direct loss, rather than permit large-scale unemployment of the capital goods industries in the leading industrial countries.


Equally important from the standpoint of preparing a worldwide attack on deflation would be the work of an International Commodity Corporation, designed to buy, store and sell international raw materials and to act as a buffer in the raw materials market. In the event that a deflation of raw material prices seemed to impend, the International Commodity Corporation should make large purchases of storable raw materials. It would permit the free play of market price forces within upper and lower price ranges for each commodity. Buying operations would be indicated as soon as the price pierced the lower limit, and selling operations as soon as it rose above the upper limit. These upper and lower limits should be the subject of continuous study by the Corporation and should be adjusted from time to time according to fundamental trends of normal demand and supply. An important part of the Corporation's function would be to search for new uses for basic raw materials, and to coöperate with the various national governments to facilitate the movement of resources out of submarginal areas in an effort to adjust normal supply to normal demand.

At the onset of an impending world-wide depression, the International Development and Investment Bank, the International Commodity Corporation and the International Stabilization Fund would each be expected to play an important anti-deflationary rôle. The action of the three institutions in exerting a counter-cyclical control might well be coördinated through an International Economic Board acting in close collaboration with each of these international institutions. Such an International Economic Board should seek to induce not only effective coördination between the three international agencies indicated, but also coördination of internal policies of the various governments designed to maintain high levels of employment within each country. The policies of the various international bodies must be coördinated if they are to achieve the greatest possible effect on world economy. Moreover, the acts of the various national governments need to be subjected to international scrutiny in order to prevent "beggar-your-neighbor" policies. The common purpose is the promotion in various countries of those expansionist programs consistent with the best functioning of the world economy as a whole. Concerted action by the various governments and by the international economic agencies is necessary when depression threatens. It also is essential if inflationary tendencies in some parts of the world are to be checked without forcing deflation and unemployment upon other parts.

In analyzing this program of international lending and investment, many readers will raise the very pertinent question of transfers of currency. Can the transfers of interest and dividend payments which the proposals entail be made from the borrowing countries to the lending countries without creating an impossible foreign exchange situation?

Intellectual honesty demands the answer that there is no assurance that this problem can be solved with complete satisfaction. There is indeed nothing certain about any program to be undertaken in the very difficult decades lying ahead. We must proceed in part by an act of faith. But I do feel that there is enough reasonable ground for confidence that the transfer problem can be solved to warrant taking the risk, particularly in view of the fact that inaction would involve a greater risk. It seems to me that the transfer problem is an entirely different thing in a world which is seriously depressed, where each country is engaged in cutthroat competition, than it would be in a prosperous world with high levels of income and employment, a strong world demand and a high volume of world trade. If we succeed in solving the problem of full employment and thereby developing a strong demand for imports in the advanced industrial countries, the relatively small marginal demand for foreign exchange resulting from the payment of interest and dividends on foreign capital will not present any seriously difficult problem. Our first concern must be to achieve high levels of income and world trade. A program of foreign lending and international investment will contribute greatly to this end and will thereby itself promote conditions favorable to a solution of the transfer problem.

There seems to be a fairly large consensus among thoughtful people in many countries that an international program should be undertaken in the three fields here briefly indicated. The organizational details of each of the international bodies which I have discussed will need to be worked out in an international conference. None of the leading governments has as yet committed itself to any program. What ultimately emerges may well prove very different from the outlines sketched here. Meanwhile, public discussion and thinking are needed to help guide government officials aright towards workable solutions.

[i] "The Economic Tasks of the Postwar World," by Alvin H. Hansen and C. P. Kindleberger, FOREIGN AFFAIRS, April 1942.

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  • ALVIN H. HANSEN, Littauer Professor of Political Economy at Harvard University; special economic adviser, Board of Governors of the Federal Reserve System; author of "Economic Stabilization in an Unbalanced World," "Fiscal Policy and Business Cycles" and other works
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