"Needed: A Common World Currency."
So asserts the title of an article in the May issue of
PHP. PHP is a monthly magazine published in Tokyo, by a dominantly
Japanese editorial staff. It is in English, however, and aimed at a
worldwide audience. The title initials stand for "Peace, Happiness and
Prosperity." The author of the article is Konosuke Matsushita, founder
of the international electric and home appliance industry, Matsushita
Electric.
The hope that Mr. Matsushita expresses is one that has
been voiced by reformers for more than a century. His arguments for it
are persuasive. He refers to the wild fluctuations in international
exchange rates in the last few years. He points out that at the
beginning of 1977 it took 290 yen to buy a dollar, but by the end of the
year only 240. He reminds his readers that in December 1971 The Group of
Ten countries met in Washington to set up a new international currency
system, known as the "Smithsonian" agreement, hailed at the time as "the
most important monetary agreement in history" - and that it broke down
in a year or so.
After that the world entered a "floating currency" era.
But this means that every day the exchange rate of every national
currency fluctuates in terms of every other. It means that no one can
foresee what any given currency will be worth in terms of any other a
year from now, or even tomorrow. And so it means that every man engaged
in import or export trade, or in any international business whatever, is
forced to some extent to become a gambler. Deploring all this, Mr.
Matsushita concludes:
We need to integrate the wide variety of currencies we
have now. In other words, I suggest we agree on the use of one currency
that will be common in all the countries of the world.... I am fully
aware of the numerous problems that would be involved, such as national
pride, differences in economic level and so on. However, if we want to
continue our community life on this planet, we're going to have to
integrate our currencies at the earliest possible date....
I suggest the United Nations or the International
Monetary Fund take up the problem, seek to overcome the difficulties
which lie in the way by eliciting the cooperation, effort and wisdom of
every country, and therefore achieve an integration of the world's
currencies for the peace, happiness and prosperity of the world.
I find Mr. Matsushita's article encouraging in one
respect but disheartening in others. It is encouraging as a sign that
leading international businessmen are beginning to call for an end to
the present intolerable chaos in the foreign exchange market, and are
willing to set aside national prejudices to achieve a return to order.
But it is disheartening as a sign that these businessmen - probably the
majority of them - still do not understand the basic causes or suspect
the basic cure for the world currency chaos.
Balance of Payments
Mr. Matsushita seems to think that the basic cause of
the changes in the yen-dollar and other exchange rates was changes in
the "balance of payments" between individual nations. He does not seem
to realize that these wide fluctuations in the balance of payments were
themselves in large part the result of different rates of inflation
within the respective countries, and consequent shifts in the
relationships between internal and external prices. His article nowhere
mentions the enormous increase in the paper-money issuance of individual
countries. And it nowhere mentions gold.
The truth is that the world once did have a common
currency, in everything but name. It had such a currency roughly from
the last third of the Nineteenth Century to 1914. It was known as the
gold standard.
The majority of leading currencies were tied together
not because they were tied to each other but because each of them was
tied to gold. Each was directly convertible on demand into a specified
weight of gold. The British pound was worth $4.86 because it was
convertible into 4.86 times the weight of gold that the dollar was. The
French franc was worth approximately 19.3 cents for similar reason.
True, as an international system this had a few
shortcomings. It would have been far simpler and made calculation easier
if each national currency had been made convertible into precisely the
same weight of gold, or at least into a round relationship to other
currencies - if, for example, the British pound had been convertible
into exactly five times the weight of gold as the dollar, the dollar
into exactly five times the weight of gold as the franc, and so on.
Fractional Reserve Gold Standard
A more serious shortcoming, however, is that the
various national currencies were not on a full gold standard but only on
what is known as a fractional reserve system. That is, the gold reserve
they were obliged to keep was not equal to the full amount of their
outstanding paper currency, but only to a fraction of it. And as time
went on, and individual countries experienced no excessive runs on their
gold supply, they yielded to the temptation to increase their credit and
currency issues more and more. Their gold reserves, in consequence,
tended to become a constantly smaller and more hazardous fraction of
their credit and currency issue.
The fractional-reserve gold standard, moreover, even
while it was preserved, suffered from a chronic defect. In good times,
one country after another was tempted to expand its volume of money and
credit. But when one country expanded faster than its neighbors, its
internal prices increased relative to theirs. It became a better place
to sell to and a poorer place to buy from. Its balance of trade (or
payments) became "unfavorable." Its currency went to a discount on the
foreign exchange market; and if that discount passed "the gold point,"
the country began to lose gold. To stop the outflow, it had to raise its
interest rates and contract its issuance of credit and currency. It was
this that caused the recurring business cycles, the alternation of boom
and bust, that were considered by its critics to be inherent in
capitalism itself.
Even the fractional gold standard was abandoned in
Europe in 1914. The belligerents feared to lose their precious gold
reserves, and in any case they wanted to be free to expand their
currency and credit.
Gold Exchange Standard
When the war was over the world went back, not to the
old gold standard, but to a "gold-exchange" standard. This was something
quite different. The gold--exchange standard meant that the majority of
countries, instead of keeping their currencies directly convertible into
gold, kept them convertible only into some "key currency" - for example,
the British pound or the American dollar - which was supposed to be
directly convertible into gold.
As formalized at Bretton Woods in 1944, the
gold-exchange standard became still more attenuated. The other
participating countries agreed only to keep their currencies pegged to
the American dollar; the dollar alone was convertible into gold. But
even then, dollars were not, as formerly, convertible by anybody who
held them, but only by foreign central banks.
The effect of this relaxation of discipline, combined
with the growth of the Keynesian ideology, was increasing and almost
universal inflation. The American monetary managers, under successive
Administrations did not seem to have the slightest realization of the
weight of responsibility they had assumed in agreeing to make the dollar
the anchor currency for the world. They continued to inflate until, when
other countries finally became more importunate in their demand for
actual gold, President Nixon officially suspended gold payments on
August 15, 1971.
A profound irony in Mr. Matsushita's proposals is that
he wants to turn over the problem of curing the world's currency ills to
the International Monetary Fund. But the International Monetary Fund is
the problem. It was set up at Bretton Woods, chiefly under the
leadership of Lord Keynes of England and Harry Dexter White of the
United States, to make inflation and devaluation easier, smoother, and
respectable. Instead of letting each country suffer the full
consequences of its own inflation, the IMF used the stronger currencies
to support the weaker. The long--run effect was only to weaken the
stronger currencies. One of the Bretton Woods' objectives from the
beginning was to "phase gold out of the system." One of the first steps
in any real currency reform would be to dismantle the IMF.
Mr. Matsushita forgets that the meeting that drafted
the Smithsonian agreement, to which he refers, came only three months
after the United States suspended gold payments; that the Smithsonian
agreement was thought necessary because of this suspension; and that it
broke down so soon because gold convertibility was not restored. There
is simply no substitute for gold convertibility.
No international organization can wave a magic wand, or
draft a magic formula, that will bring a sound "world" currency. Each
nation must bear full responsibility for its own currency. It can make
it sound only by making it convertible into gold. And it can make and
keep it convertible only by strictly and constantly limiting the
quantity of that currency.
Because of the dismal recent record of practically all
countries in swindling their own citizens, the return to an honest
convertible currency may now be difficult and remote. Individual nations
can begin by strictly limiting any further expansion of their credit and
currency issue. Meanwhile they can grant the right to their own citizens
to coin gold privately and even to issue gold certificates against their
coins.
When governments are ready themselves to return to a
gold standard, it would be well if this time they kept a 100 per cent
gold reserve behind their paper currency and so removed the expansionary
temptations of a fractional--reserve system. And it would be an
excellent thing, also, if their new currency unit were fixed as a
definite round weight of gold, say a gram, and were called simply a
gold-gram- - instead of a dollar, franc, mark, peso or what not - and if
at least the leading countries could agree on the same gold weight for
their unit. Then the world would really have, for all practical
purposes, the "single" and common currency that Mr. Matsushita would so
much like to see.
At the time of the original publication, Henry Hazlitt
noted economist, author, editor, reviewer and columnist, was well
known to readers of the New York Times, Newsweek, The Freeman,
Barron's, Human Events and many others. The most recent of his
numerous books was The Inflation Crisis, and How to Resolve It.
Reprinted with permission from The
Freeman, a publication of the Foundation for Economic Education, Inc.,
August 1978, Vol. 28, No. 8.
Yourname@libertyhaven.com
