One Currency for the World? by Henry HazIitt
[This material is made available with the generous permission of The
Foundation for Economic Education. Copyright c 1995 by The Foundation for Economic Education. ISBN
1-57246-005-9]
[Reprinted from The Freeman, August 1978.]
[http://www.fame.org/research/library/hh-006.htm]
"Needed: A Common World Currency."
So asserts the title of an article in the May 1978 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 company,
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 percent 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
goldgram--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. |
