Bank of the World

The U.S. and Great Britain were this week deep in all-important economic discussions. Their subject: a precise, elegantly written memorandum by Britain's famed economist, John Maynard Keynes, aimed at the stabilization of postwar exchanges and the promotion of worldwide foreign trade.

The Keynes memorandum, though discussed for months in Washington and London, has been wrapped in secrecy. But this week a fuller statement of the plan came from London, where the proposal may shortly be issued as a White Paper. In that event, the U.S. Treasury may issue a counter-memorandum.

To political leaders and to U.S. businessmen alike the Keynes proposal is of immense significance. Though world trade is naturally at a standstill, even U.S. postwar isolationists now believe that some such plan is a key to postwar prosperity and continued peace. As in the case of the Beveridge Plan for social security, Britain has laid down the first proposal. And again Britain drew on her top-drawer talent. Economist Keynes first made his reputation in 1920 with his devastating criticism of the Versailles Treaty--The Economic Consequences of the Peace. Since then his pioneering work on the theory of employment has widely influenced U.S. economists, New Deal and conservative alike.

The Plan. The Keynes proposal calls for the establishment of an international clearing agency or central bank, which would assist in setting appropriate rates of exchange between the currencies of the world. To this bank each nation of the world would contribute a certain amount of its own currency or of gold, in return would get credit on the central bank's books in a new bookkeeping unit, to be called the "bancor."*

This unit would be given a tentative value in gold. More important, currencies would have a definite value in relation to the bancor, and to gold, and thus would be related to each other. Thus if sterling were valued at four bancors and the dollar were valued at one bancor, the pound-dollar rate would be the official four-to-one ratio.

Though it makes use of gold, the Keynes plan is not a return to a rigid gold standard. One reason: many nations are now practically stripped of gold, and international exchange of goods cannot await its redistribution. Another: many an expert believes that exchange rates should be subject to revision without the disasters which ensue when nations are forced "off" gold.

How It Would Work. The Bank would probably begin operations holding some gold and substantial amounts of national currencies. If, for instance, the U.S. then exported more goods to England than England sold to the U.S. (and if other transactions did not affect the balance) the bank would find its supply of English pounds diminishing, its supply of American dollars increasing. By the same token England's credit in bancors would be going down, and the U.S. credit in bancors would be increasing.

If this continued over a long period it would indicate that trade relations were unhealthy. The situation might be remedied if the World Bank made a loan to the debtor country, and presumably the function of the bank would be to extend short-term loans to destitute nations. But eventually the bank would be expected to call for some readjustment. One readjustment might be an attempt to revalue such a country's currency in terms of gold and the bancor unit. A revision downward would make it easier for the debtor country to export, more difficult for it to import.

But experts who have considered the Keynes plan emphasize that revaluation of currencies is no cureall. Other lines of action would be: 1) to try to persuade nations tending to run trade deficits to reduce prices and costs, thus stimulating their exports; 2) to try to persuade nations running big export surpluses to raise prices by internal fiscal policy and thus to export less and import more; 3) to persuade nations to abandon restrictive tariffs and other trade barriers.

Britain and the U.S. The success or failure of any such plan would lie in basic economic and political world conditions. The condition of Britain after the war will be of critical importance. Britain bore the economic brunt of armament long before the U.S. Before the passage of Lend-Lease, England saw her gold stocks reduced from $2 billion to $152 million. Foreign investments and other assets were reduced from about $15 billion to about $10 billion. Much of her merchant fleet has been destroyed. She has been building up an increasing indebtedness, chiefly in short-term balances, with such countries as India, Canada, Argentina and other nations--balances now exceeding $2.5 billion.

The handling of these short-term balances will be problem No. 1 for England and for any international authority, since their sudden withdrawal from London would wreck any currency stabilization plan. But Britain's position is far stronger than often supposed. Through her ability to give Lend-Lease in reverse, and to supply Lend-Lease to Russia on an equal if not bigger scale than the U.S., Britain has shown her inherent industrial potential. In the course of the war she has sharply increased the skill and efficiency of her labor. Her proved ability to build high-grade aircraft, plus her far-flung bases, should give her a substantial slice of postwar air traffic. Finally, to the degree that she is able to curb inflation, she will emerge with a relatively favorable level of prices and costs.

Much depends on U.S. policy. If the U.S. tries to push exports unduly, without importing, through further devaluation of the dollar or by forcing inequitable exchange rates on other nations, she could obstruct the flow of world trade. The U.S. might likewise wreck world trade by raising tariffs or killing reciprocal trade agreements. And only by contributing to world stability can the U.S. avoid the flight of "hot money" capital from country to country such as occurred in the '30s, as war clouds gathered. It was this more than anything else which disorganized the exchanges, and gorged the U.S. with unused gold.

The Hope. The U.S. Treasury may propose a somewhat different use of gold than that contained in the Keynes plan. But most monetary experts agree that the best thing that could happen is for the U.S. to lose some of her gigantic stockpile of the metal through the process of normal trade relations. This should be possible, provided the U.S. does not again return to economic isolationism.

The hopeful thing about the Keynes plan is that it is a call to international cooperation. Significantly, it is addressed to all the United Nations, has been subject to consideration by China, Russia and other countries. To the degree that the U.S. and Britain can make world reconstruction--especially in Europe and China --their business, they will the more easily solve their own differences. The Keynes plan is the first major, government-blessed piece of economic thinking aimed at channeling Anglo-American relations towards larger objectives.

* Because it is strictly bank money of account, not of issue, whose value is related to gold, probably from the French bancor.

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