RATIFICATION URGED

Otago Daily Times, Issue 26214, 26 July 1946, Page 7

RATIFICATION URGED

BRETTON WOODS AGREEMENT

ECONOMISTS’ ANALYSIS (P.A.) WELLINGTON, July 25. Emphasising that they are actuated only by a desire to assist the de'iberations in a matter bearing strongly, not only upon the welfare of New Zealand, but upon the whole future of civilisation, Professor C. G. F. Simkin, Professor of Economics, and Mr H. R. Rodwell, senior lecturer in Economics at Auckland University College, have sent an open letter to the members of the General Assembly urging ratification of the Bretton Woods agreement. In the section relating to the background of Bretton Woods, they state that one x of the major factors in the cause of the great depression was that the gold standard proved quite unsuitable for conditions of the post-war world.

“It would not be true to say that it caused the drepression, but it undoubtedly contributed greatly to its intensity,” the letter states.

that there were difficulties in equating external receipts with external payments because of discrepancies between internal and external price levels, however these' might have arisen. It would not, of course, include adjustments to meet chronic surpluses or deficits in the balance of payments, arising from quantitative restrictions on trade. “ Under the gold, standard the method of meeting such difficulties was to deflate in order to keep the exchange rate&constant. But under the fund the normal method will be to vary the exchange rate and thus avoid deflation. ’’ The fund hopes to preserve reasonable stability of exchange rates under these arrangements by ruling out competitive devaluations, and by ensuring that when adjustments are necessary they are made in an orderly way; but it is very far from requiring countries to sacrifice their economic conditions to rigid exchange stability. “It is thus based on fundamentally different principles from the gold standard. and certainly avoids the major defect of gold in imposing deflation in bad times.

“ The immediate cause of the depression was probably the abrupt cessation of American foreign lending after the Wall Street crash, since this exposed other nations to a serious shortage of dollars, and involved them in cumulative strains over their balances of payments.’ Gold standard conditions required that shortages in the balances of payments should be corrected by deflation—by reduced banking loans and by reduced Government spending. “ Under modem conditions this inevitably led to mounting unemployment and to deepening depression,” the statement continues. ‘ The proposal for the wosd bank has aroused little controversy,' since its objectives are so clearly urgent and desirable, but the International Monetary Fund has met with much more than its fair share of criticism and misunderstanding. Basically it is an attempt to provide the monetary facilities required for healthy world trade in such a way as to avoid both the damaging deflations of the gold standard and the evils of fluctuating exchange rates and of blocked exchange funds.”

"On joining the fund, the member nation is required to fix the exchange value between its own currency and gold. At first sight, this provision suggests a return to the gold standard, since the .essence of that standard was the maintenance of equality between the value of a currency and the value of gold. But the further provisions of the agreement make it perfectly clear that this is far from being the case In the first place, a country can alter the gold value of its currency (or what is the same thing, its exchange rate), within 10 per cent, limits either way at its own discretion,, and can apply to the fund for permission to make further changes. * Besides attempting to secure reasonably stable, although by no means rigid, exchange rates, the fund also seeks to avoid the blocking of exchange funds in respect of trade transactions, by requiring members to agree not to impose restrictions on external payments for dealings. Import Selection " Restrictions, however, can still be placed on capital movements, and the New Zealand delegation to Bretton Woods received an assurance that import selection was not ruled out (provided that payments on imports actually admitted were not prevented). " Lord Keynes confirmed this view by giving his opinion that the fund would not prevent a country from using its foreign exchange to purchase goods from one country rather than from others. It would only prevent the country holding the exchange balances of another member from restricting the conversion of these balances, according to the wishes of that member. “ There can, therefore, be no reasonable doubt that the International Monetary Fund would not require any modifications in our present system of exchange and import control. " Furthermore, restrictions can even be imposed on current payments in respect of ‘ scarce currencies.’ ”

Referring to common objections to the fund, the statement says two of the commonest are that the fund means a return to the gold standard conditions, and that it will lead to economic domination of the world by the United States. "As we have shown, there is absolutely no foundation for these fears in the text of the agreement. The fear of domination by the United States, besides being ungenerous to an ally which saved the Empire through lend-lease, and has granted Britain such substantia] assistance fpr reconstruction of its trades, would depend upon the supposition of a sinister * ganging • up' of the United States with its allies to seize control of the fund. Even if this dark assumption were credible, it is hard to see how the United States could manipulate the fund against the interests of the other members, in view of the definite principles of operation laid down by the agreement, and in view of the possibility of immediate resignation Avoidance of Deflation " The fund must grant such permission if the adjustment 'of its exchange rate is required to correct a ‘ fundamental disequilibrium in the balance of payments.’ Fundamental disequilibrium would mean

“ Nevertheless, it does make minor provisions for the use of gold, for it would clearly be carrying anti-gold convictions too far to deny gold any usefulness at all in international payments. Such a view would be contrary to our own interests as a gold producer. Gold may be used to pay part of a country’s subscription to the fund—2s per cent, of its quota or 10 per cent, of its gold holdings, whichever is the less. “New Zealand’s quota is £15,625,000, and we would pay £750,000 of this in gold. Again, the fund may buy any member’s currency with gold, and any member can use gold to buy its currency back asain from the fund. Interest charges on loans of other currencies from the fund are also payable in gold, but only if it is in the member's power to pay in gold; otherwise the payment is made in the member’s own currency. To see a return of gold is surely to grasp at shadows. We wish to assert quite categorically that the International Monetary Fund does not mean an open or a disguised return to the gold standard. Groundless Fear “Another common fear is that the United States would use the fund to force other countries to accept a flood of American exports, to the detriment of their own industries. This fear is groundless, because the fund provides safeguards against 'such possibility; namely, the raising of exchange rates and the discriminating restrictions allowed under the scarce currency clause.. Furthermore, the fund- itself does not prevent the retention of import control, which alone would be adequate to handle such a situation. " Colour is sometimes given to these rather loose assertions by the fact that the United States is anxious to secure reduction of Imperial preferences. These, however, are matters for the proposed conference on trade,, and employment, and are not even mentioned in the Bretton Woods agreement, which is exclusively concerned with monetary matters. “ There is not a single reference to tariffs or preferences in the whole text of the agreement, so that joining the fund carries not the slightest obligation in regard to Imperial preference or tariffs. “A very common objection is the claim that Joining the fund means the surrender of economic or monetary sovereignty, and would place our monetary and financial arrangements under the control of other nations. But the fund has no direct controls of any kind over the monetary conditions of its members. The only restraints it imposes on them are to limit their complete freedom to vary exchange rates, and to withhold payment on current external transactions.

“We have pointed out that the members are free to vary exchange rates within the 10 per cent, discretionary limits, and that the fund cannot refuse permission for adjustments needed to correct a persistent deficiency in the balance of payments. It is, moreover, expressly forbidden to withhold such permission * because of the domestic, social, or political policies of the member proposing the change.’ These two restraints are both reasonable and light. They surely allow us ample enough scope for independent monetary management, especially as the fund would permit us to continue with import controls and with exchange control over capital transactions.” The statement points out that if the fund succeeds.it will lead to a marked expansion of world trade, from which no country is likely to benefit more than New Zealand, since no country has a higher level of external trade per head. “ In the sphere of international politics,” the letter concludes, " New Zealand recently won a deservedly high reputation for wise and forceful contributions. It would be more than unfortunate if this prestige were to suffer from refusal to play our proper part in international economic institutions.”