Reforming the World’s Money

188 Pages·1965·19.169 MB·English

by  Roy Harrod (auth.)

REFORMING
THE WORLD'S MONEY
REFORMING
THE WORLD'S MONEY
BY
ROY HARROD
PALGRAVE MACMILLAN
STMARTIN'S PRESS
New York
rg6s
Copyright © Roy Harrod 1965
Softcover reprint of the hardcover 1st edition 1965 978-0-333-06236-4
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ISBN 978-1-349-00429-4 ISBN 978-1-349-00427-0 (eBook)
DOI 10.1007/978-1-349-00427-0
Library of Congress Catalog Card No. 65-15747
CONTENTS
-
CHAPTER PAGB
PREFACE Vll
I. THE NATURE OF THE PROBLEM I
2. FLEXIBLE EXCHANGE RATES 34
ss
3· GOLD
4· MUTUAL CURRENCY ~GEMENTS 86
5· THE INTERNATIONAL MoNETARY FUND 119
I. Drawing rights as deposits IZO
II. Once-over increase of quotas 127
III. Annual increases of quotas IZ8
IV. Re-structuring of the Fund 132
V. Loans and investments 148
VI. The dollar and sterling 154
VII. Amendments to Articles of Agreement 158
6. 161
PROSPECTS
INDEX 179
v
PREFACE
I
N the case of a work on a topical subject the reader may
desire information on the chronology of its composition.
The plan of the book was completed,· seminars held, and
a part of the book written, during the early months of 1964,
when I was in the University of Pennsylvania. I must express
gratitude to that university for its having given me the
opportunity to devote time to this work. I had the privilege
of being associated with an international group of economists
who held successive meetings at Bellagio during 1964. Their
report was published under the title of World Monetary
System: The Problem of Choice (Princeton, August 1964).
The greater part of this book was written during the summer
months of 1964 and completed in September. Since then
rather important relevant things have happened. To secure
early publication it was decided that I should not have galley
proofs. I have, however, working subject to page-proof
limitations, introduced some new matter (January 1965),
mainly on pages 97-101.
An Englishman must have deep gratitude for what was
done to help sterling on November 25, 1964. The swift
operation, achieved within ten hours - has so large a sum
ever been mobilized in so short· a time?-was an illustration
of the close co-operation now established among central
banks, and was also a token of the confidence placed in the
integrity and credit-worthiness of the British financial
authorities.
While there could be no more striking proof of smoothly
working co-operation and of the power of the central banks
to deal with crises of this sort, we must not infer from this
episode that the world's monetary system is not in need of
reform. Rather the other way round. The occurrence of the
vii
Vlll PREFACE
cnsts was itself a manifestation of weakness in the world
system. It is true that the British had, during the preceding
months, run into a substantial external deficit, after being in
balance for about three years. But neither the size nor the
duration of this deficit were of a kind that should provoke a
crisis. In some quarters blame is placed upon the newly
formed British Labour Government. I make no comment on
this, except to say that a democracy would not be a democracy
if it were not entitled to change its government, and even to
select a Party to govern that might provoke distrust in
some financial quarters, anyhow in the early stages.
By way of credentials for writing a book on reforming the
world's money, I may be allowed to say that I was in close
contact with Keynes when he was drafting his plan for a
'Clearing Union', and in the consideration that had sub
sequently to be given to the American counter-proposals;
and I wrote numerous memoranda on the subject at that
time. I accordingly had direct knowledge of many of the
events that determined the constitution of the International
Monetary Fund, of which Keynes is usually regarded as the
twin founder. I worked for about six months on the Research
Staff of the Fund (1952/3). I have given much thought to its
problems during the last twenty years. It is natural for me,
having been connected in this way with its first beginning,
to have definite ideas about its further evolution.
R. F. H.
CHAPTER I
THE NATURE OF THE PROBLEM
T
HE topic of this book is the amount and nature of the
reserves held by countries to meet occasions when they
have to make payments to other countries. This might
appear to be a technical question only, and one capable of
being handled without too much difficulty by the financial
authorities of the various countries. I believe, on the contrary,
that this is a major problem, and indeed the most important
problem confronting those responsible for economic affairs in
the free world. It may well be that the success of the system of
free enterprise (including 'mixed economies'), as compared
with that of totally planned economies, in promoting human
welfare, depends more than on anything else on their success
in dealing with this problem. A paradox! But paradoxes often
express more profound truths than platitudes. It is the object
of this first chapter to explain why this matter is important.
We dare not assume that the problem is likely to be handled
smoothly by the relevant authorities. For one thing, there is a
strong vis inertiae. Then, if one seeks to make changes in
existing arrangements, one. soon encounters prejudices and
ideologies of formidable strength.
We shall be concerned primarily with reserves available for
use by the monetary authorities of countries, normally the
central banks, for making payments, as required, to other
countries. And we shall be concerned primarily with more or
less 'liquid' reserves. This word 'liquid' itself gives rise to
argument; there may be disagreement about where the line
should be drawn between what is and what is not liquid; there
may be varying degrees of liquidity. A liquid reserve is one
that can be used readily for making payment, and that is
I
2 REFORMING THE WORLD'S MONEY
intended so to be used, as and when required. The citizens of a
country may have investments and properties overseas; in
a great emergency, such as war, these investments can be
mobilized by the central government and sold, and the
proceeds used for making payment. This was done by the
British government on a large scale during the Second World
War. We do not reckon such investments as part of the
countries' liquid assets, or, as we shall usually call them for
simplicity, 'reserves'. A mobilization of these assets would
usually involve a serious disturbance of long-range plans, as
well as an unwelcome interference with individual liberties,
and the sudden sales of such assets might involve heavy losses,
as they did for Britain during the war. Measures such as these
are to be envisaged only on rare occasions of extreme
emergency.
The reserves we have in mind are assets held by central
banks, of kinds to be enumerated presently, which are held
precisely for the purpose of making payment in case of need.
The need arises when there is an overall deficit in a country's
external balance of payments.
There are two points of the utmost importance in this
connection which should be constantly born in mind ..
I. The sum total of reserves of all countries cannot be
increased by the prudent foresight of each of the countries
separately in adding to its own reserve. If one country takes
appropriate steps to increase its own reserves, this must entail
the depletion of the reserves of some other country or countries,
except to the extent that the sum total of reserves is growing at
the time. The point is that the prudent actions of countries
seeking to improve their own reserve position cannot have the
collective effect of increasing the sum total of reserves. Such
an increase, if it occurs, depends on something entirely
different.
2. In international accountancy the overall surplus of one
country must be exactly balanced by the overall deficit of
some other country or countries. This proposition goes against
the grain of the ordinary thinking by individuals about their
THE NATURE OF THE PROBLEM 3
own affairs. Individuals have the idea, which is correct, subject
to one condition, that there is no reason why they should not
all run their businesses in such a way that they all show a
surplus, or profit, at the end of the year, nor why they should
not run their private live~ in such a way that their incomes
show surpluses over their expenditures. If some do not do
that, it is reckoned to be their own fault. There is no question
of one man's surplus necessarily entailing a deficit on the
year's account for some other person. The 'one condition'
referred to above is that this system will work only if the
savings collectively made by the various individuals are
channelled into an equivalent amount of capital outlay by
other individuals and firms. So long as some capital outlay is
going on, the individuals and businesses can show, as a collec
tion, a net surplus on the year's work, without there necessarily
being any deficits in the system at all. The matter is entirely
different in the case of international accountancy.
The consequence of this is that we may normally expect a
number of nations to be in deficit in a given year. It would be a
sort of miracle if all the various debits and credits accruing to a
particular country in a given year balanced exactly, especially
in a system where individuals have freedom in their inter
national trade and investment dealings. This might not be so
in the case of a country which had a rigid system of state
control over all foreign trade and investment. But even in the
case of such a country as the U.S.S.R., the sporadic arrivals of
gold from time to time suggest that its interlocking agencies
may have some difficulty in arranging for an exact balance on
the external account.
The general rule that one country's surplus must be another
country's deficit is subject to one exception. If a gold-producing
country balances its external account partly by the export of
gold it may reckon that gold on the same basis as any other
newly produced commodities, thus counting its export of gold
as part of its total exports, and not regarding its export of
gold as a sign that it is in deficit. To the extent that the gold
goes to the central banks of other countries, they will not