Wriston, Walter B.
A great deal has been written about the direction and tempo of change in today's world. America's attitude toward gold is a case in point.
There was a time just before the Second World War when a top economist of the Federal Reserve Board, Mr. E. A. Goldenweiser, predicted with incredible accuracy that one of the great problems facing the world and the United States would be to achieve a redistribution of gold after World War II. Our severest critic would now concede that such a redistribution has been achieved.
As learned men have worried about our capacity to distribute gold to the world, so, also in the past, there has been at least one time when the United States was reluctant to accept gold -- even as a gift. That hesitation occurred in the early 1800s when a wealthy British scientist, James Smithson, directed that his entire estate should go to the United States to establish an institution "for the increase and diffusion of knowledge among men."
Those of you who are impatient with the progress of monetary reform can take comfort in the fact that the question whether or not to accept the largess of the late Mr. Smithson was debated in and out of the Congress for 10 years. While the controversy raged, the legacy -- nearly 105,000 British pounds paid in gold sovereigns -- was delivered from the hold of a clipper ship to the Philadelphia mint where it was melted down and recast as American coin. In those days, this came to an amount well over half a million dollars, which was a considerable fortune.
The money itself was deposited in the United States Treasury at an interest rate of six percent per annum. It remained there until Congress, largely through the urgings of John Quincy Adams, who had to overcome the strong objection of John C. Calhoun, graciously accepted this alien gold in 1847 and with it created what is now the Smithsonian Institution.
Irreverent souls have dubbed the Smithsonian Institution America's attic, for into it we have poured all the assorted memorabilia of this country. After the recent meeting of the Group of Ten Finance Ministers in the Romanesque common room of the Smithsonian to design a new international financial package, the ministers left behind monetary memorabilia. They gave the institution renewed function, turning it from America's attic into a global attic.
Museums, after all, are treasure houses of the past; they are places where people go to see beautiful or valuable objects or to see things which were once important, but no longer have a useful function in our society. In this larger sense, it seems to me fitting and proper that a museum was the setting for the signing of an agreement which sharply departs from two once -- valuable and important monetary institutions.
It is possible that the concepts of fixed exchange rates and the convertibility of the dollar into gold belong in the Smithsonian to take their place beside Eli Whitney's cotton gin, the Spirit of St. Louis and rocks from the moon. Perhaps we should be hanging up a suit of the Emperor's clothes in the costume gallery at the Smithsonian because the world perceived that those twin vestments of our monetary system existed for a period long after they had ceased to have any reality.
While they functioned, they served the world very well indeed. The link to gold helped the dollar evolve gradually into the main international reserve asset. It led to an open and expansive international monetary system which responded unobtrusively to the action of the Governors of our own Federal Reserve Board. This system provided a degree of international monetary stability which allowed the dismantling of the network of exchange controls that had been built just prior to and during World War II. But men and nations tend to endow their successful institutions with an assumption of immortality -- often without really understanding why these institutions work or how much of their success depends upon conditions that no longer exist.
The world is full of folklore and myths which continue to be stated as facts and many seemingly logical arguments are based upon those assumptions. It is the old story of being more comfortable with illusion than with truth. The international monetary system is no exception. One of the fundamental tenets of times past was the desirability of fixed exchange rates. The argument has been made, time and again, that one of the main reasons world trade has grown and prospered since the end of World War II was the existence of a system of fixed exchange rates. This premise is often accepted as gospel; it is in reality no more than a polite fiction.
Let me remind you, for example, that the largest two-way trade in the world is between Canada and the United States. The Canadian Government has never fixed the price of gold. Canada, in fact, also allowed its exchange rate to fluctuate from September, 1950, until May, 1962, and again from May, 1970, until the present day.
Our friends in Europe sometimes take this illustration as atypical. They tell me that Canada and the United States are somehow different. At times, Europeans forget that Italy did not have an established par value for the lira with the International Monetary Fund from 1946 until 1960. France, often cited as the bastion of monetary orthodoxy, did not establish a par value with the IMF during the 10 years between 1948 and 1958. France, where fixed exchange rates are spoken of with reverence, has changed its currency in relation to other currencies no less than seven times since 1948.
Of 21 major industrial countries, only the United States had no change in the par value of its currency between 1946 and last December. Twelve of the 21 nations devalued their currencies more than 30 percent against the dollar. Five nations -- Germany, the Netherlands, Switzerland, New Zealand and Austria -- had upward revaluations. Of the world's leading currencies after the dollar, the yen was the most nearly fixed. The exchange rates in the developing countries have been even more unstable.
Absolute fixed rates were indeed a myth. We have long paid lip service to them when, like the Emperor's clothes, they did not really exist. What we had, instead, was a fixed dollar that became the bench mark against which other currencies fluctuated. The dollar was said to be as good as gold, and the option of devaluing the dollar against other currencies to redress our own balance of payments was not open to the United States. Other nations, however, could avail themselves of the option of devaluing against the dollar. The record shows that in a period of so-called fixed exchange rates, this option was used by other countries again and again.
The fixed exchange rate system probably reached its zenith in 1958 when many exchange controls were removed and general external convertibility was introduced. The test of the compatibility of fixed exchange rates and free exchange markets then began. To prop up the dogma, free markets gave ground. Indeed, the United States was among the countries which began imposing new exchange controls early in the 1960s.
It could be argued that these controls were aimed not at defending the dollar, but at defending the price of gold and the fixed exchange rates. Since then, we have seen controls become more and more pervasive in a series of futile efforts to support inflexible rates.
The other myth which appeared to sustain us in the postwar period was the convertibility of the dollar into gold. We should have known, at least since 1960, that the convertibility of the dollar into gold was a myth. We knew that if any central bank in the world attempted to convert a massive amount of its dollar reserves into gold, the United States would use every available device to dissuade it. The money traders of the world knew, too, that if any nation persisted in demanding gold, the United States would shut the gold window.
Statistics show that the United States' share of the world's monetary gold, which in 1949 reached 70 percent, has declined today to roughly 25 percent. In a dangerous world it was unrealistic in the extreme to believe that the U.S. would not keep enough hard metal reserves to meet any contingency. To all who would look it was obvious, therefore, that the day would soon come when we would not permit our gold reserves to dwindle further.
One of the reasons that world trade grew and prospered in the postwar era was the relative peace that the world enjoyed. In no small measure, this relative calm could be attributed to the fact that the United States of America paid the price to hold the nuclear shield, protecting both ourselves and our allies and preserving the uneasy balance of power. Over the years we have paid a disproportionate amount of the costs, which are now beginning to be shared more equitably. While we paid the check for the defense of the free world, on the commercial front the American dollar fueled the revival of Europe and Japan.
In fact, the world learned to live off the U.S. balance-of-payments deficit and to enjoy it. The Japanese were able to permit the yen to become substantially undervalued relative to the dollar. Such undervaluation acted as a massive and continuing subsidy for its own exporting industries. A return to the convertibility of the dollar would be a renewal of efforts by the United States to underwrite a fixed exchange rate system. In trade terms it has worked largely against our interests.
Those days are past, and the fiction of a dollar convertible into gold, which really has not been anything but a fiction for a number of years, should be left in the Smithsonian along with other relics of the past.
Money and trade must always be viewed together and the Smithsonian Agreement recognized this fact. It had become increasingly evident that the barriers to American exports were growing around the world. GATT and IMF decisions specifically authorized the use of trade restrictions of one kind or another as instruments of national policy to readjust balance-of-payments equilibrium. Happily, these privileges have been used sparingly. Those at home and abroad who shy away whenever the linkage of trade and money is mentioned must constantly be reminded that they are inseparable.
At this moment in history, the world is suffering from a kind of cultural shock since, for the first time in a generation, American negotiators have seriously advanced our own economic national interest and not just the concept of freer trade. This posture has been taken by some of our friends as an indication of arrogance and rudeness when, in fact, this is not the case. Our position reflects only the realities of the day. It marks the end of the postwar period when the United States picked up the check for the world, while at the same time permitting our trading partners to raise barriers to the export of American goods. It is a new world. We face a new set of circumstances which calls for new attitudes all around the table.
The Bretton Woods Agreement was a masterly document. It was drafted in an era in which the assumption was made that the nations of the world would be politically willing and able to accept the discipline of the gold exchange standard as a control on their domestic priorities. The system that actually developed, which basically lay fallow until the late Per Jacobsson breathed life into the Fund, really imposed no such discipline. Indeed it is difficult to find a historical example of a nation which did, in fact, consistently subordinate its domestic economic policies to the requirements of international payments equilibrium. The fact that the United States underwent four major recessions in the last 20 years -- none of which corrected our balance of payments -- is often overlooked amid harsh admonitions from our friends abroad who keep insisting that we should put our "house in order" through restrictive monetary and fiscal policies.
The classical gold standard, so brilliantly described many years ago by Jacob Viner, could operate in the days when national value systems were quite different from those of today. One has to live in a dream world to believe that the government of any nation will permit the discipline of the balance of payments to override what it perceives to be its own national priorities. Whether we like it or not, there is not a government in the world which is not committed to maintain full employment for its citizens. If the choice is between maintaining reasonably full employment and readjusting currency values, the decision is predictable.
What made fixed exchange rates appear to be possible was the special status of the dollar. The acceptability of the dollar as a reserve asset, coupled with the Federal Reserve's expansive policy in the Sixties, helped other countries to maintain high growth rates and full employment, and at the same time build up their international reserves. Under this system, the United States payments deficits actually fueled world production and trade. In effect, the Federal Reserve, perhaps unintentionally, became to some extent a supranational central bank shaping monetary policies around the world.
Other nations were not always happy with the consequences of this set of circumstances. This was particularly true after 1964, when the United States first began to be accused of exporting inflation. The Federal Reserve's international role, however, had its beneficial side. It served to coordinate monetary expansion in the other industrial countries sufficiently to keep their price levels more or less in line with each other. In retrospect, the Federal Reserve's role made it possible for major exchange rates to remain relatively stable prior to the mid-Sixties.
To be sure, the apparent link between gold and the dollar added to its attraction as a reserve asset. But that link also concealed the politically unpalatable fact that the world was on a de facto dollar standard. In reality, it was not the dollar's legal link to gold that made this system work, but rather the dollar's fixed value in relation to other currencies.
While other exchange rates might rise or fall individually, the dollar was presumed to be immutable. For a long time it was taken for gospel that the dollar would never be devalued by the United States. Nor would it be devalued by the collective revaluation of other important currencies. These post-World War II assumptions were what made the dollar, for so long, the international money par excellence. This was what made it possible for the United States to serve as a kind of central banker to the world.
All this is now history. The general upward movement of other currencies against the dollar in the spring of 1971 was the point of no return. The formal suspension of the gold link and the Smithsonian Agreement merely drove the point home.
The world must live from now on with the reality that the dollar is just another currency. Like other currencies, it is not immune to pressures. Nor is it immune to devaluation whenever our external accounts are persistently out of balance.
There are many people in Europe and some in this country, however, who cling to the old monetary myths. They insist there is no alternative to fixed rates and the gold-dollar system. They claim that all countries have the responsibility of keeping their external payments in balance at fixed exchange rates by domestic measures. My conclusion is different. The evolving international monetary system must be more flexible than that. It must not be put in the straitjacket of fixed exchange rates -- at least between the dollar and other major currencies. It must not be dependent upon the convertibility of the dollar into gold or into Special Drawing Rights. These are no longer realistic options.
The time has come for greater exchange-rate flexibility. This could help solve a multitude of problems. If currencies were exchanged at their true market values, there would be no massive balance-of-payments surpluses or deficits. Adjustments would tend to be taken care of by the market. This would greatly reduce the importance of international reserves and also the whole problem of what reserves should consist of gold, silver, diamonds or Special Drawing Rights. Flexible rates would also eliminate the intricate machinery for trying to keep the values of various reserve assets stable.
Not the least of the virtues of such flexible rates would be a state of affairs in which we would again become masters in our own houses. That is to say that we, and other countries as well, would be more at liberty to run our domestic economic life without worrying so much about the alignment of our price levels or business cycles with the rest of the world. The movements of the exchange rate would automatically adjust for any imbalances. In short, flexible or floating rates would render unto the market that which belongs to the market.
The bureaucrats of the world are all brothers under the skin. They will relentlessly press the notion on their political masters that the world should once again go back to the jungle of exchange controls. The tendency to hold fixed exchange rates in such high regard seems to provide a legitimate excuse for the imposition of exchange controls and other trade barriers as a means of maintaining these rates. The process feeds on itself. There are always voices raised in high places suggesting that the United States should control its outflow of capital and that other nations should control the inflow of capital, thereby replacing the judgment of the free market with a network of regulations. All this, despite the fact that short of an all-out war, there is no instance in recorded history where direct controls have worked over any extended time.
The tide of nationalism is rising around the world and the voices of those who would throw away the experience of dismantling trade barriers in the last quarter of a century are growing louder. In my own country, we have the introduction in our Congress of the Burke-Hartke Bill, which is perhaps the worst piece of legislation introduced since the Smoot-Hawley Tariff of 1930. In the expanding Common Market, the progress in lowering the barriers, tariff and nontariff, against our goods is slow. It is time for those of us who believe in free markets internationally to stand up and be counted. It is time for people of all nationalities to review the dreary history of controlled economies and to speak out for free markets.
Since it threatens the popular myths, a freer system of exchange rate adjustment has enjoyed a bad press; nevertheless, the wider bands set by the Smithsonian Agreement are a first tentative step in the direction of freer exchange rates.
It is an interesting irony of history that people always prefer the devil they know. The general response around the world to the breakdown of the gold and dollar system has been a general reassertion of the belief in fixed exchange rates and convertibility of the dollar into gold or at least into Special Drawing Rights.
What I suggest to you today is that neither fixed exchange rates nor the convertibility of the dollar into gold represent realistic options in today's world. Unfortunately, the choice before the world is either to go back to the jungle of exchange controls, nationalism and momentary trade advantage; or, alternatively, to accept a greater exchange rate flexibility between the dollar and other major currencies in the world.
If rates were made more flexible, the question of the dollar's convertibility into gold or Special Drawing Rights would lose a great deal of its apparent importance. Payments deficits and surpluses between the dollar and other major currencies would tend to be minimized. This process, in turn, would tend to downgrade the importance of the question of reserve assets and convertibility.
It is time to begin a new international monetary system. It is not the time to go back to yesterday's mechanism or for the nations of the world to turn inward and to rebuild a network of controls. The ability of free markets to adjust to the realities of the world is enormous and exceeds even the confidence of their greatest advocates. We should urge it along. The dialogue has already started. Today, more than ever, there is an urgent need for the highest degree of international cooperation, both at the governmental and the private level. The complexity of the problem argues for deliberation rather than for speed.
Those of us who work in the area of world trade and finance must use whatever influence we have to ensure that the new payments mechanism will continue to permit the world to expand its areas of freedom, and not return to the restrictive practices of the late 30s and the World War II period. Nothing less than the direction and prosperity of the world are involved in this decision.