Speech

1 Speech delivered before Illinois Manufacturers Association . .. Chicago, Illinois March 20, 1945 . • " MONETARY AND CREDIT AGREEMENTS ENTERED INTO AT BRETTON WOODS Last August while in London I had opportunity to study the plans for reconstruction and postwar economic stability of some of the governments in exile—particularly Belgium. The problem is immense, and its solu- tion, -or lack of solution, will affect us. It is an international prob- lem. The American people want to know, and rightly so, what our Govern- ment is planning for the long-range period after the war. As you know, plans are well advanced for the establishment of a food and agricultural organization of the United Nations. The meeting at Yalta has cleared the path between Dumbarton Oaks and San Francisco. And as the President told the country, on March first of this year after his return from Yalta, work is progressing on proposals to strengthen the Trade Agreements Act of 1934, to secure international agreement for the reduction of trade barriers, to control cartels and to provide for the orderly marketing of world surpluses of certain commodities. Within the past few weeks considerable progress has been made at the Mexico City Conference in dealing cooperatively with problems of this hemisphere. During much of the period between the First and Second World Wars, one of the greatest obstacles to the orderly exchange of goods and serv- ices between countries was the uncertainty and difficulty which sur- rounded payment for these goods and services. The conference held at Bretton Woods last summer—which I had the privilege of attending—agreed on far-reaching proposals designed to remove this obstacle and enabling legislation is now before our Congress. What were the conditions in the two decades between the wars? Peace after the First World War was .precarious and chaotic. In the political field, many countries experienced revolutions and counterrevolutions, or at the least frequent changes of government. In the economic field, much industrial plant had to be rebuilt to serve the needs of peace instead of war, and overworked farm land had to be reconditioned. People who had gone without through the war years scrambled for the meager available supplies of consumer goods. Prices shot up and we experienced all over the world a postwar inflation. International exchange was out of joint. Commercial contacts, broken by the war, were difficult to restore. Ex- change could not be found to buy the imports needed for reconstruction and to put national economies back into working order. Monetary disor- ders spread throughout the world. Those who could, shifted their funds about looking for a "sound" currency—one that had some stability. It is generally known that before 1914 the value of most currencies had been expressed in terms of so many grains of gold. Since gold was a commodity accepted the world over, this was an easy means of comparing the relative values of different currencies. For example, the French franc was fixed by law at about one one-hundredth of an ounce of gold. The English pound sterling was fixed by law at about one-quarter of an ounce of gold. Therefore, by simple arithmetic, one pound sterling was the same as 25 francs or one franc was one twenty-fifth of a pound. Be- cause of this fact, international trade could effect the exchange in goods based on a known relation between currencies of various countries. With the outbreak of the First World War, most countries refused to permit the export of gold and their banks ceased to pay out gold to indi- viduals. The gold standard was abandoned. After the war, however, every effort was bent to return to the gold standard. But it was not always possible and in some cases it was not desirable to return to the old values for the various monetary.units. England, however, did; so strong was the desire to return to what was considered to be normal relations that, in 192$, a pound was declared to be worth as much in terras of gold as it had been before the war. But.this was too high a value for the pound, and it proved a great strain to maintain that value. Unfortunately, there was no international machinery under the gold standard under which the rates could be altered. There was no flexibility. There was rigid- ity. A change in the par values of currencies was a major operation which had its repercussions on the economic nerve structure of world trade. On the other hand, France did not return to the old value for the franc. The impact of the war and reconstruction upon the French economy had lifted commodity prices and made goods much more expensive in France. That is, it took far more francs than before the war to buy the same quantity of goods. By the same token, It took more francs to buy a pound sterling; the exchange value of the franc fell. Then in 1926, the franc was stabilized at approximately 125 francs to the pound instead of 25, as before the war. There was no possibility, of return- ing to the old parity, and France was realistic in not endeavoring to do so. But a flight of capital had preceded French stabilization and the return flow of capital afterwards aggravated the difficulties of other countries, especially-England. • You can imagine, if you do not recall, how difficult it was to carry on international commercial and financial business under these changing and uncertain conditions. There was ba3ic uncertainty in val- ues—in prices—in exchange. These conditions were needlessly protrac- ted because each country operated on its own. There was no comprehen- sive plan for collaboration and cooperative action to restore a func- tioning international monetary system. Small loans were made to some countries to help them stabilize their currencies; buy this assistance was sporadic and uncoordinated. Each case was treated separately. Toward the end of the 20 »s it was vainly imagined that normalcy had been restored. But the difficulties in the international.field were f even worse in the 30s than in the preceding decade. As conditions in the 20's had settled down there had begun to be^ a considerable volume of international, investment. Part of this was in long-term loans on which the interest and amortization charges made a heavv call upon the borrower's foreign exchange resources. Much of it represented short-term lending, partly in the form of deposits in for- eign banks and the purchase of speculative securities, part-y the ii- nancing of trade. Large quantities, of goods were imported by the debtor 1 countries on credit. In many cases, borrowing lar exceeded toe capacity of the country to repay, when the funds borrowed were not especially used to enlarge the productive resources of the country. 3 1 When the regular flow of United States loans abroad contracted sharply toward the end of the 1920's and finally reversed itself, and when the great depression occurred in the United States, foreign coun- tries found their supply of dollars drying up. Dollar loans had disap- peared and their exports to this country fell from about four and one- half billion dollars in 1929 to about a billion and a third in 1932. The drastic shrinkage in their supply of dollars forced many of them to default on their indebtedness to us and to curtail their current pur- chases of our goods to the mere essentials—that is, the absolute mini- mum of their needs. There was no machinery for international cooperative action to deal with such a situation. Each country felt that it was "on its own" and^ hastened to clamp on exchange and trade restrictions. Some hope to stim- ulate their exports by making it cheaper for other countries to buy their goods. They did this by reducing the price of their currency. They de- preciated. At the same time they tried to reduce their imports. The re- sult was a general falling off in world trade. Exporting countries began to suffer from declining production and increasing unemployment. Coun- tries whose economies were geared to a high level of imports could not find the exchange to pay for their imports. As a result the volume of international trade in 1934 was only about one-half as great as it had been in 1929. All this added up to the world-wide depression of the 30's which is still fresh in our memories. At that time I was here in Chicago and well do I remember our situation, for I was then City Comptroller. The banks were closed. Tax collection was held up ty a reappraisal of real estate. And when we began again to collect taxes the depression was upon us and property holders were unable to pay taxes. People were out of work. Each blamed the other for the difficulties. Back of the domestic de- pression was a world economic situation. To keep things moving even on a low level, countries began to make agreements with others on the basis of "I'll buy more from you if you will buy more from me". Trade was forced into bilateral channels. Coun- tries no longer bought in the most advantageous market. They bought wherever they could make a deal through the maze of regulations and re- strictions which hampered international exchanges. There is no need to describe here the devices—some of them ingenious and all of them in- tricate—which were invented in this deadly game of economic war. We know now that it was almost as destructive to national and international well-being as had been the actual hostilities of the First World War. And it laid the basis for the Second World War. I have taken this much time to recall to you the handicaps which confronted international trade after the last war because some people ap- pear to have forgotten them, or at least their memory has dimmed. But those who were alert to the dangers of a repetition of these conditions after this war have devoted time and energy to seeking a way to avoid such a recurrence if possible. Interested individuals began systematic study more than three years ago. After many conferences and discussions, preliminary, highly tentative proposals for an international monetary institution were presented to the public in April 1943. A draft for an h International Stabilization Fund was published by the United States Treas- ury and a draft for an International Clearing Union was published by the British. Both proposals were put forward to encourage all interested par- tie's to contribute to the solution of the extremely complex problems in- volved. Both proposals were widely studied, compared, debated and dis- ; cussed, orally and in writing, by individuals, and in small and large groups, here and abroad. As a result of the wide area' of agreement that was found to exist, a Joint Statement of Experts was published in April 1944,. Further discussion culminated first in a preliminary meeting of representatives of many nations in Atlantic City in June and finally in the July Conference at Bretton Woods. The Bretton Woods Agreements, es- pecially the Fund px'oposal, are designed to aid in achieving reasonable stability in the international monetary sphere in order to make possible a revival and expansion of world trade on a multilateral basis. They are a step—and a long step—in the right direction. Admittedly, the Bretton Woods Agreements are not a panacea for all the ills of the world. Unless the major industrial countries, especially the United States, succeed in maintaining reasonable stability of employ- ment at high levels there will be very little chance of avoiding the f measures of economic warfare employed in the 30s. In effect, these were measures to "export unemployment". By importing as little as possible and exporting as much as possible, each country hoped to keep its own people working. There is reason to believe that the major countries now are de- termined by domestic measures to prevent wide fluctuations .in employment. Economic stability and full employment in the United States are certainly an accepted aim and purpose. But these should be reenforced ty a healthy condition of international trade. The acceptance of the Bretton Woods Agreements will contribute in a substantial measure to the ability of countries to maintain employment at high levels without resorting to at- tempts to "export unemployment" to other countries. If we are to have a healthy world trade, we need reasonable stabil- ity in foreign exchange rates, and adequate credit distributed where it will do the most good in rebuilding and developing national economies. The Bretton Woods Agreements are technical documents, the product of the exports of AA nations, but they can be summed up simply. They spell out cooperation in the monetary and credit fields, and give detailed.ways in which this cooperation can be achieved. The agreements provide for the establishment of two international institutions; an International Monetary Fund, and an International Bank for Reconstruction and Development. The Bank proposal is relatively simple. No serious differences of opinion arose in the negotiation of the Bank agreement, which has received widespread support and approval. The Bank follows a well-known pattern. Its job is to investigate projects for the reconstruction of war-torn areas, and for the development of backward lands for which long-term in- ternational loans are needed. When it is satisfied that a project is pro- ductive and that the borrowing country has a reasonable prospect of repay- ing the loan, the Bank will see to it that the loan is forthcoming on reasonable terras. This does not imply the elimination of private invest- ment but it is unlikely that enough private capital will be lent to coun- tries in need of reconstruction or development without some encouragement, especially immediately after the war when conditions will be uncertain. The Bank will operate for the most part either by guaranteeing loans made £ by private investors or by making loans with funds borrowed from private investors. The benefits of the International Bank will be many. It will help members to achieve.stable economies. It will distribute the risks of in- ternational lending. ' Although we ray .furnish most of the loans which the Bank guarantees,"this conn cry's share in meeting'the risks involved will be only $3 billion as a consequence of its subscription to the Bank. If; international loans are made through the Bank, the dangers of imperial- istic lending will be avoided. International supervision of foreign loans will make it difficult for foreign loons to be used as an instru- ment of political policy. The conditions which surround the issues of debentures by the Bank insure that they will be a prime investment se- curity since the total of-the Bank's loans and guarantees may not exceed the amount of its capital, surplus, and reserves. Only one-fifth of the $9.1 billion subscribed by member governments can be used directly for making loans. The rest will remain in the form of unpaid subscriptions as a guarantee fund to meet any losses that the .Bank may incur. The International Monetary Fund Agreement deals with a more diffi- cult problem than does the Bank. Wider differences of opinion had to be. reconciled before the negotiations were concluded. Changes will have to be made in it from experience. There is provision for amendment and there is room through interpretation for adjustment to conditions as they arisfe. It aims to prevent a repetition of the chaos which followed the last war and of the destructive monetary practices of the 30's, both of which I have reviewed- It substitutes ccoperative international de- • cisions and international action for the state of affairs we had in the past, when each country made its own decisions and acted alone in what it thought were its own interests.- Under the Fund Agreement each member establishes the gold value of. its currency by agreement with the Fund. Gold is still the most widely acceptable means of international payment. But this is not a return to the old gold standard.- Although each country undertakes to maintain the established value of its currency at par, there is necessarily provision for altering the parity if it becomes evident that this value is too high or too low (because of changed conditions in the country's international position). The Fund will approve only changes that are really necessary, and object to those which are not. This means that no country will be able to sell its currency cheaply—that is, to depreciate its money in order to secure a competitive advantage for it3 exports. We have learned that when one country tries to secure competitive advantage over another by depreciation ether countries are not likely to stand by idly but will join in the scramble with disastrous consequences for all. The Agreement also eliminates special exchange rates for particular types of transactions. Germany was the country which developed this de- vice most fully. In the years before the war there were all sorts of reichmarks, representing the receipts from different kinds of business with Germany. The non-Gorman owner could not dispose of these freely since the use of each type was limited to a particular purpose such as to pay tourist expenses in Germany, to buy certain types of goods, and so on, and the value of each kind in terms of other currencies varied greatly. In this way Germany arbitrarily made it cheaper or more 6 expensive to buy particular German goods or to sell particular commodities to Germany, and manipulated this device to obtain $ competitive advantage in international trade. The requirement that the Fund approve necessary changes (after the first 10%) will also mean greater stability of exchange rates in the long run. Not only will unnecessary changes be eliminated, but necessary changes can be made in an orderly way before the situation is completely out of hand. , .- If French production costs (wages and other items) for instance, happen to rise much above production costs in England, French producers will gradually lose their foreign markets—both in England and in other countries—to British producers. French producers will lose even in their domestic market, as their high cost goods are being increasingly displaced-by lower cost goods imported from Britain. If the basic mal- adjustment in the cost structure is nob the result of a temporary condi- tion^ but reflects a fundamental and lasting change, French production will eventually decrease, unemployment will rise and monetary reserves will be drained by the deficit in the balance of payments. The French^ currency will tend to fall in value, speculators will rush to buy foreign exchange and, in many cases, the resulting monetary depreciation of the French franc will be greater than what was really called for to correct the initial cost maladjustments. If an appropriate change is made in the value of the currency relative to the currencies of other countries be-^ fore this train of circumstances is set in motion, much confusion and dis- tress will be avoided and the necessary adjustment can be an orderly one. European currency, history between the two wars illustrates this problem in the clearest possible way. As I said before, in 1925, England went back on the gold standard at the prewar gold parity, while continen- tal countries depreciated their currency to a considerable extent. The resulting cost disparities between England and other countries resulted in a severe and protracted (economic depression in Great Britain until the devaluation of the pound in 1931. As the pound declined further and fur- ther in the following years, production costs in Europe increased in terms of sterling and, in turn, became completely out of line with Brit- ish costs. The attempts of the gold block countries to maintain the parity of their currencies in the face of such heavy internationalcost disparities led to intense depression and unemployment and proved futile in the end. Belgium was the first country to bow to the inevitable. Her relatively prompt decision permitted her to limit the devaluation of the Belgian franc to only 28 per cent. France meanwhile resisted to the last, with the result that the devaluation, when it came, depreci- ated the French franc by about 60 per cent as compared with the Belgian 28 per cent. Under the Agreement also, all members promise to "eliminate restric- tions on foreign'exchange transactions as soon as possible. Of course, during the war, each country must keep strict supervision over itsin^' ternational transactions. I am not speaking of war-time controls but of the sort of regulations in effect before the war. Many countries at that time had less foreign exchange than they needed. That meant that importers in those countries were rationed as to the amount of foreign exchange they could use, and exporters were required to turn over their receipts to some governmental agency which parcelled them out. This 7 arrangement? as we have seen, interfered with normal trade, which was shifted into particular channels, and often led to the domination of the economy of one country by another for political ends. The case of Germany and Hungary illustrates what happened. In prep- aration for war, Germany was anxious to acquire large stocks of goods, and was willing to pay well for them in German marks. The Hungarian Gov- ernment had subsidized farm output in order to avoid the bankruptcy of its farmers when agricultural prices in world markets dropped, and the prices of Hungarian wheat and meat were much higher than Germany would have had to pay elsewhere. But Germany could not buy elsewhere because it did not have the dollars or the pounds or the pesos to do so. An agreement was signed between Hungary and Germany whereby Germany agreed to take Hungarian goods at the high Hungarian prices, and sell to Hungary German goods—also at high prices. The transactions were balanced against one another in a "clearing account". Each country tried to prevent an unsatisfied debt from piling up in the clearing account. Under this ar- rangement both Hungary and Germany were paying more than they should have for the goods which each imported from the other. Hungary lost its other markets because of its high prices and had to concentrate on the German market. Germany began to dictate trade terms to Hungary, to tell it what sort of goods it must produce if Germany were to take them. When Germany went to war, the Hungarian economy was firmly tied to that of Germany and thus Hungary inevitably became a partner of the Axis. This is the sort of thing we do not want to have happen again. Un- F der the \ind Agreement, members undertake to abandon such bilateral clear- ing arrangements and discriminatory currency practices as give exporters special premiums if they ship goods to countries the currencies of which are particularly desired. This commitment applies only to restrictions on foreign exchange transactions on current account, that is, those aris- ing out of shipments of good3, tourists' expenditures, immigrant remit- tances, and the rendering of services. Members are permitted to control capital transactions such as money sent for deposit in foreign banks or for use in stock market operations. Heal investment can be encouraged and the speculative movement of funds limited; this will contribute sub- stantially to international monetary stability. It is not expected, of course, that the whole body of regulations over foreign exchange transactions will be done away with at once. Only confusion would result. The patient is very sick, and recovery, at best, can be only gradual. On the other hand, unless a concerted effort is made as soon as possible to eliminate such practices, there i3 grave danger that many countries will fall back on them to balance their inter- national transactions after this war. They must have an alternative which will make such action unnecessary. However earnestly the member countries may desire to live up to their agreements as far as exchange rates and exchange restrictions are concerned, it will not be easy for them to do so. To help them, a Fund of almost $9 billion is to be established, made up cf gold and the cur- rencies of all the countries which are members. This Fund will be used to assist member countries faced with temporary balance of payment 8 : difficulties suchas might follow a bad crop or a loss of a market for a short period. Should the deficit prove to be more than temporary, the Fund will continue to give the. member assistance only if it takes adequate steps to correct the situation. X have sketched briefly the mechanism of the Fund, and indicated the aims which it is hoped it will achieve. Doubtless, you have all heard a and rean some criticism of this plan, and I should like to mention the main point around which this criticism centers. During the last twelve or thirteen days I have been attending and closely, following the hear- ings on the Bretton Wood? proposals in the Banking and Currency Commit- tee of our House of Representatives and feel that the quest for infor- mation concentrates mainly on this point. It has been argued in some quarters that foreign countries will abuse their privilege -of drawing on the Fund and that the fund's resour- ces will be wasted. The position taken by the critics is that in order to insure that members take advantage of the time during which they are drawing on the Fund to correct the unbalance in their international posi- tion, aid should be given only after special investigation and agreement as to the conditions under which the funds are to be used. This view misinterprets the very essence and purpose of the Fund. A country wh'ich has agreed to keep its currency stable without use of exchange control must have immediate access to the resources of the Fund. The exchange market must be balanced from day to day and hour to hour. A country can not let its currency depreciate while it negotiates over a period of weeks for the resources with which to support it. If a member did so, it would break its agreement with the Funa and threaten to unsettle the whole exchange market. • There are, however, a whole series of automatic and discretionary controls specifically designed to prevent undue use of the Fund by any member country and to ensure wise use of the-Fund's resources. Take, for example, the important automatic controls. Definite-lim- its are established on the amount of foreign exchange a member may obtain from the Fund in any single year or as a maximum over a period of years unless special permissipn is given to exceed the.se limits. Secondly, member countries must pay a small service charge on all foreign exchange purchased from the Fund. In addition, an annual charge is levied on a member country using the fund. This charge increases, the larger the use of the Fund's resources, and the longer,the.period over which the resources are used by a member.country. Thus, a steadily rising pressure is"put on a member country to. reduce its drawing on the Fund. Another automatic control is the obligation of all member countries to repurchase their own currencies from the Fund with gold or foreign exchange. This obligation is so framed as to require countries adequately supplied with gold and foreign exchange reserves to draw on them at the same rate that they draw on the Fund. And it also requires (with quali- fications) countries which.are gaining gold and foreign exchange to use half of the amounts gained to reduce their drafts on the Fund. The discretionary controls are even more important than the auto- matic controls. The Fund can postpone the beginning of its exchange 9 operations until it is satisfied that most members are in sufficiently- stable condition to warrant use of the Fund's resources. Furthermore, once it has commenced general exchange operations it can postpone trans- actions with any individual country which is not in a position to make appropriate use of the Fund's assistance. Finally, the Fund has a very important discretionary power to en- sure that the country will take advantage of the time during which it is drawing on the Fund to put its house in order and correct its position. The Fund can stop a member from drawing on the Fund if it is not using its resources in accordance with the purposes of the Fund. The purposes as stated in the Agreement make it quite clear that the Fund is to be used to help countries meet temporary deficits only and to give them time to correct more deep-seated maladjustments. It is evident to me that the period during which the Fund and the Bank are needed most is the immediate postwar period before individual countries begin to impose new and additional restrictions on foreign ex- change and foreign trade. Prompt establishment of the Fund and the Bank would also give member countries confidence which they must have to place their economic houses in order with the least possible delay. It therefore seems to me that with the knowledge we have of the problems of the 1920's and the 1930's we have agreed at Bretton Woods with competent representatives of other countries on sound economic principles to help solve these problems and the solution of these prob- lems is in our interest. Therefore the International Monetary Fund and the International Bank for Reconstruction and Development should, after due and proper consideration, be approved by our Congress.

M.S. Szymczak (1945, March 19). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19450320_szymczak

@misc{wtfs_speech_19450320_szymczak,
  author = {M.S. Szymczak},
  title = {Speech},
  year = {1945},
  month = {Mar},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19450320_szymczak},
  note = {Retrieved via When the Fed Speaks corpus}
}