THE ECONOMY & THE CITY
Money : 2. International
By NICHOLAS DAVENPORT
IN one respect international money is like 'domestic money, which I discussed last week— there is not enough of it. As Ml'. Harold Wilson told the Economic Club in New York on April 14: 'All our hopes and our efforts for freer trade are in danger of grinding to a standstill, as an automobile may seize up through lack of lubri- cating oil, if we do not ensure that the volume of world liquidity keeps pace with the demands upon it which expanding trade will involve.' For the first time we have a prime minister who not only understands the problems of international money but can exercise a personal influence in the solution of them. He has already made a big impression, according to my informants, in Paris as well as in New York on this controver- sial issue.
To begin at the point where Mr. Wilson inter- vened in Paris. The French had become dis- satisfied with the gold exchange standard set up at the Bretton Woods conference because it had been exploited, they said, by the Anglo-Saxons. It was too easy for the two reserve currencies to Too into deficits on their international accounts and when a serious debt had been piled up the Americans in particular put obstacles in the way of converting dollars into gold. What is more, they made full use of their paper dollars to take over good French industrial companies. One sympathises with the French point of view. But one cannot accept the conclusions to which their natural annoyance has driven them. Spurred on by that rigidly orthodox ex-banker M. Rueff, General de Gaulle virtually wants to return to the full gold standard and to have international balances settled in gold. He does not believe that there is a Basic shortage of international liquidity : the imbalance in world payments is due, he says, entirely to the American deficit. The return to gold, he thinks, would cure the trouble.
It is these erroneous nations which Mr. Wilson
was able to demolish so successfully when he went to see the general in Paris. He had what he described 'as a fascinating academic exchange with M. Rueff.' He showed him that his gold idea was 'effectively repudiated thirty-five years ago by Keynes in the second volume of his Treatise on Money.' And he assured General de Gaulle that the French analysis of the liquidity situation was faulty--that there would be a serious short- age of liquidity were it not for the American deficit which, he said, had 'concealed it, disguised it and mitigated its worst consequences.' A proof of this fact was demonstrated while Mr. Wilson was in Paris because the measures taken by the American Treasury to defend the dollar, namely, the calling home of American money from the Euro-dollar market, had created the most severe money shortage that Paris had seen for a very long time. The French had to admit that real money power lay with the Americans.
As Mr. Wilson reminded the Economic Club, the increase iu world gold supply had come from three sources—South Africa, the Soviet Union and Fort Knox. Unfortunately, the measures taken by the American Treasury to defend the dollar had had the effect of temporarily closing the Fort Knox mine—'an event,' he said, 'as significant in world monetary terms as though a great earthquake had closed the whole of the South African mining industry.' 1 am told that M. Rueff, who came to lecture in New York when the Prime Minister was there, admitted that his campaign had failed—that the price of gold was not going to be raised—but whether he and the general are prepared to accept Mr. Wil- son's far-reaching reforms of the present gold- exchange system is another matter.
And far-reaching the reforms will have to be. As the Prime Minister said, we are in the same primitive stage in international monetary rela- tions that national financial systems were in be- fore the revolution in the use of credit. While Internal monetary resources were based on gold holdings it was impossible to get the development and production which new industrial techniques made possible. We urgently need today, he said, to find the means of supplementing world liquidity reserves with credits to finance approved development plans 'without plunging either importing or supplying countries into balance of payments difficulties.'
A number of varying plans have been put forward—by the IMF, by the Group of Ten, by various economists American, British and European, by the Brookings Institution, by Mr. Wilson himself and by the French TreaSury. (The French plan for a new composite reserve currency—CRU— might be adapted to the Posthuma plan drafted a few years ago by the managing director of the Netherlands Bank which is now finding favour in Germany and Italy. Professor Posthuma suggested that a new fiduciary international reserve should be created consisting possibly of the dollar, sterling and an EEC unit.) The main object of international mone- tary reform is to get away from dependence on gold, which is in short supply and very expensive, and create a fiduciary reserve currency backed by the advanced industrial nations as a supplement to the gold and foreign currency reserves of the IMF system. It is surely not beyond the wit of the experts to devise a scheme which can unite the French and Anglo- American ideas and provide a useful supplement to world liquidity. It is certainly not beyond the wit of Mr. Wilson. The problem is extremely urgent. 'There is too much at stake,' he said, 'for it to be decided by reference to national pride or attachment to any particular plan. Even more so it is true to say there is too much at stake for the problem of world liquidity to become a part of the small change of any undeclared conflict for leadership and power within the Western alliance. . . . What is at stake is the prosperity of ordinary men, women and children all over the world.'
I am told that this fine peroration brought the house down at the Economic Club in New York. I only hope that Mr. Wilson will exploit the 'initiative he has won and enable Mr. Callaghan to put forward at the IMF meeting in September compromise proposals for increasing world liquidity which will be acceptable to both sides of the western alliance.
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