The Fruits of Foreign Lending
[Newsweek column from February 3, 1947, and reprinted in Business Tides: The Newsweek Era of Henry Hazlitt.]
Now that the International Monetary Fund is no longer a dream but a reality, all the problems that were so lightly set aside by the rhetoric and propaganda used to get the plan adopted by Congress are beginning to emerge in their full dimensions. The whole approach at the Bretton Woods monetary conference was unsound. The International Bank, and particularly the fund, were set up to deal merely with the symptoms and consequences of international monetary chaos and not with its causes. The irony of the fund is that it could work only under practically ideal conditions, in which it would not be needed.
The first thing to remember is that monetary chaos is not primarily “international” at all. It exists basically within each nation. If each nation’s currency unit were freely convertible into a definite weight of gold, if there were no overissue of its currency, so that this convertibility could be at all times maintained, then the relationship of one currency to another would necessarily be fixed and stable. If the dollar were always convertible into, say, one-thirty-sixth of an ounce of gold, and the pound into one-ninth of an ounce of gold, then pounds would always be freely convertible into dollars at a ratio of one to four. But where there is no common unit of measurement there cannot be anything more than, at best, a temporary and unreliable exchange stability.
The Bretton Woods arrangements ignored all these basic considerations. They tried to cure international monetary instability by hiding its symptoms or preventing its consequences. They provided in the fund that when any nation’s currency started to slide downward, the nations with relatively strong currencies must use them to buy the weak currencies at par. Of course a currency can be kept at par by doing this—as long as the strong nations are willing to throw their money away and as long as that money holds out.
United States Steel or any other stock could be kept at par as long as someone with sufficient funds kept in a standing bid to take all the stock offered at par. But the SEC and the stock exchange would soon bring charges against such a bidder of flagrant manipulation. If a private agent, moreover, used his client’s money to buy stocks or anything else above the open-market price, he would be sued for breach of trust or dissipation of funds. But when governments do such things, they are given pleasanter names and are justified by the complex reasoning of “economic experts.”
The managers of the fund are not even permitted to make their buying of currencies contingent upon internal reforms in the nations whose currencies they are supporting. Insistence on such reforms is regarded as “interference” in the internal affairs of such nations or outside “dictation” of their policies. The nations with sound currencies are merely permitted—in fact, obliged—to finance the inflationary policies and all the other economic errors of the nations with sinking currencies.
The only real remedy for this fantastic situation would be for the United States to withdraw entirely from the fund. The articles of agreement themselves permit it to do this “at any time.” At the very least, if the fund is not to end in a disastrous failure, the United States ought to insist on an amendment unequivocally authorizing the managers of the fund to withhold the use of its resources from any nation which in their opinion is following either internal or external policies not conducive to exchange stability.
Among such policies the amendment should list specifically excessive deficit financing, excessive expansion of currency or bank credit, trade discrimination against other member nations, unreasonable exchange controls, a policy of autarchy, of military or diplomatic aggression, and so on.
When governments could no longer have their economic errors subsidized from the outside, at least major follies might be brought to a halt in time. Meanwhile, our government continues to pour out billions of dollars of foreign loans. A great deal of these will certainly never be repaid in full. Not only is our government failing to get really compensating monetary and trade reforms in exchange for these funds, but it is aggravating
a domestic boom and inflation, and preparing a corresponding reaction for the future.