A Cry for Change

While striving to keep the peace and maintain its own prosperity, the Western world in recent months has faced an unusual series of crises and alarums involving its monetary system. The pound has been attacked, the dollar's value questioned; gold is again and again the subject of debate. To narrow its payments gap, the U.S. has had to slash its foreign lending and investment--and has done it so successfully that many Europeans are now worrying about a money shortage. The latest development came last week when Britain, in an effort to correct its payments deficit, was forced to curb its domestic buying power and overseas investments, a move that will further increase the pinch on Europe. Designed to stimulate trade and economic growth and to foster monetary stability, the world monetary system has lately seemed to be more a barrier than an aid to those ends.

The deficiencies of the monetary system have raised the loudest cries for reform since the system was set up in 1944. British Prime Minister Harold Wilson, whose financial policies are in large part being dictated by international bankers, has bitterly condemned "the archaic limitations of our international monetary machinery." Former U.S. Treasury Secretary Douglas Dillon felt so strongly about the matter that in his farewell statement two weeks ago he said: "The greatest financial challenge is to work out changes in the international monetary system." French Economist Jacques Rueff, who influenced Charles de Gaulle's call for a return to the gold standard, concedes that he "would prefer almost any solution to no solution at all."

In search of a solution, financial experts from the ten leading industrial nations--the so-called Group of Ten--met two weeks ago in Paris to weigh various proposals, on which they will report next month. The U.S. has assigned a hush-hush group of economists and bankers to study possible reforms under the direction of Frederick Deming, the Treasury's Under Secretary for Monetary Affairs. Other study groups have been put to work by the 102-nation International Monetary Fund, by Europe's Common Market, by the Organization for Economic Cooperation and Development, and by governments from Berne to Tokyo. Nearly all agree on the need for improvement in the monetary system, even though they differ widely in their proposals.

Supercharged Bank. As the system now stands, the Western world suffers from the lack of a truly international money. In recent years, it has used dollars and pounds to finance almost all of its growth in trade. When the U.S. and Britain run big payments deficits, they pump out plenty of dollars and pounds for the world to use. When other Western countries accumulate a lot of dollars and pounds, on the other hand, their bankers start to complain of inflation and tend to trade in some of that money for U.S. and British gold. There is constantly a dilemma: either Washington and London lose gold, or the rest of the Western world runs low on capital.

The oldest and perhaps most radical plan for reform, first suggested by Britain's Lord Keynes, is to turn the IMF into a supercharged world central bank with powers to create its own money. Yale Economist Robert Triffin revived and modernized this idea in 1959, and it has been embraced--in one form or another--by such experts as Prime Minister Wilson, former British Exchequer Chancellor Reginald Maudling, Greece's Central Bank Chief Xenophon Zolotas and Bank of Italy Governor Guido Carli. Wilson's version of the plan would work this way: 1) the IMF would create certificates of credit; 2) countries would buy these certificates with their own currencies, use them to settle foreign debts; 3) the IMF would use the national currencies that it collected to back its certificates. The IMF would also lend its certificates to underdeveloped countries in order to expand their buying power in world markets.

The obvious advantage of this plan is that it would create more money that could be used in international trade. The obvious flaw is that many countries might be reluctant to turn over to the IMF powers to expand and contract the international supply of money. Replying to that objection, IMF Managing Director Pierre-Paul Schweitzer notes that the size of the money supply is now determined by such hazards as the extent of the U.S. dollar deficit and the amount of South African gold production--and that it would be far better for the world to control its monetary reserves by "deliberate decision."

A somewhat less extreme idea, lately popularized by Economist Edward Bernstein, an influential White House adviser, is to have small but powerful groups of countries generate new international currencies of their own. Bernstein proposed that nations in the Group of Ten create a money--backed by their own francs, marks, yen and kroner--that would gradually supplement pounds and dollars in world trade. He figures that sponsor countries could expand this supply of new money by about $1 billion a year.

French Finance Minister Valery Giscard d'Estaing has also called for the Group of Ten to create its own money, but he wants to use it only as a minor supplement to gold. France's main aim is to upgrade the importance of gold, of which it has plenty, and downgrade the dollar and the pound. The Common Market is talking about printing a six-nation money, and its economic chief, Robert Marjolin, figures that such a move could later open the way for a Group of Ten money. The U.S. opposes the idea of a Group of Ten money because, although it belongs to the Group, its influence in it is not large.

Easier to Borrow. The U.S. would rather reform the monetary system by expanding the lending powers of the IMF. One of Washington's pet ideas is to vastly increase the IMF's lendable funds and make it easier for countries to borrow those funds to settle international debts. The IMF is in the midst of increasing its reserves from $15.8 billion to $21 billion; last week the Senate Banking Committee voted to boost the U.S.'s contribution to the IMF from $4.1 billion to $5.2 billion. The snag is that France has refused to raise its contributions, and such wealthy countries as The Netherlands and Belgium have not contributed as much as they could.

The most conservative idea for reform is that of Europe's most influential central banker, Bundesbank President Karl Blessing, who is less interested in expanding the supply of reserves than in heading off inflation. He would keep the current monetary system largely intact but limit the amount of dollars and sterling that countries can hold in their reserves. He calls for a ratio of one-third currency, two-thirds gold. Blessing is basically endorsing an idea conceived by Suardus Posthuma, former managing director of The Netherlands' central bank--but Posthuma proposes a 60-40 ratio in favor of gold. Either proposal would prevent countries from accumulating big, inflationary piles of dollars, would also head off crises by forcing all countries to cure their deficits before they grew dangerously large. Reason: countries would have to dip into their limited stocks of gold to pay off most of their debts, and they simply could not afford to run big deficits.

Strong Position. In this motley of ideas, several points stand out. The drive to open new pools of international money is accelerating; the powers of the IMF are destined to grow larger. Though the dollar will maintain a dominant position, financial experts almost unanimously agree that the world should no longer depend on U.S. deficits for most of its new reserves. Now that the U.S. is narrowing its payments deficit and strengthening the dollar, it is in a stronger position to negotiate. Last week Treasury Secretary Henry H. Fowler called reform of the money system "the major task" of the world's financial ministers in the months and years ahead. He assured everyone that he approaches that task "with an open mind and a willingness to study all practical proposals."

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