===== PAGE 1 =====

Benjamin M. Anderson 487

others. And for that purpose we must beware of every topic, By singleness of purpose, by steadfastness of conduct, by
however attractive, and every tendency, however natural, tenacity and endurance, such as we have so far displayed, by
which turns our minds or energies from the supreme objec- these, and only by these, can we discharge our duty to the
tives of the general victory of the United Nations. future of the world and to the destiny of man.

Foreign Exchange Stabilization

KEYNES AND MORGENTHAU PLANS

By BENJAMIN M. ANDERSON, Ph.D., Professor of Economics, University of California at Los Angeles
Delivered at a Dinner Given by the Officers and Directors of the Los Angeles Chamber of Commerce, May 11, 1943

zation plans* are in essence very similar and their Section III, 6, is to be read in connection with Section VI,
objectives are essentially the same. The differences 7, to which I shall refer below, which makes it the duty of
between them would not prevent their giving us essentially member countries to adopt appropriate legislation or decrees
similar results. They have in common the following points: to carry out its undertakings to the fund and to facilitate the
Each would create a great international bank (whether you activities of the fund.
call it fund or call it clearing union doesn’t matter) the re- 8. Member countries are required to agree that they will
sources of which are contributed by the central banks or offer to sell to the fund, for their own local currency, or
stabilization funds of the different countries. This interna- for foreign currencies which they need, all foreign exchange
tional bank. dealing only with central banks or government and gold they acquire in excess of the amount they possessed
financial institutions, is to buy and sell the currencies of the immediately after joining the fund. They are to agree also
different countries in such a way as to keep them in fixed to discourage the accumulation of unnecessary foreign bal-
relation to one another. ances by their own nationals.
9. The fund is to buy from the governments of the mem-
Powers AND OPERATIONS OF THE MORGENTHAU BANK jor cjuntries “abnormal war balances held in the countries,”
The Morgenthau plan provides (Section III) that the and to hold them for twenty-three years subject to certain
fund shall have the following powers: qualifications. This Is an extraordinary proposal which is
1. “To buy, sell and hold gold, currencies, bills of ex- basic also in the Keynes plan, and 1 shall discuss it more

change and government securities of member countries; fully later.
to accept deposits and to earmark gold; to issue its 11. The fund shall have the power to borrow the cur-

own obligations and to discount or offer them for sale rency of any member country, but the Morgenthau plan
in member countries, and to act as a clearing house reserves the veto power of the United States in this con-

for the settling of international movements of balances, nection. i Lo
bills of exchange and gold.” 12. To sell member countries’ obligations owned by the
fund, provided that the Board representative of the country
The Keynes plan bank would have the same general powers, in which the securities are to be sold approves, and to use
except that 1 do not find it stated in the Keynes plan that its holdings to obtain rediscounts or advances from the Cen-
the fund may issue 1ts own obligations and offer them for ra] Bank of any country whose currency the fund requires.
sale in member countries. CL 13. To invest any of its currency holdings in government
2. To fix the rates at which it will buy and sell one securities and prime commercial paper of the country “of

member's curiency for another and the rates in local cur- that currency,” provided four-fifths of the members vote
rencies at which it will buy and sell gold. Changes in these approval.

T HE Kevnes and Morgenthau foreign exchange stabili- creditor country in the effort to get more of its money. This

rates can be made only by four-fifths vote, which gives the 14. To lend to any member country its local currency
United States a veto power. The Keynes plan does not in- from the fund, for one year or less, up to 75% of the
clude this veto power. currency of that country held by the fund, again with the

3 and 4. To sell to the treasury of any member country United States veto power reserved.
at a rate of exchange determined by the fund currency of 15. To levy upon member countries a pro rata share of
any member country which the fund holds. There are vari- the expenses of operating the fund, limited to one-tenth of
ous qualifications on this power designed to limit the trans- 1% of the quota of each country
actions to financing adverse balances of payments on current 16. The fund shall deal only with or through:
account, and to prevent the fund from being used for capital
transfers.

But 5, with the approval of four-fifths of the member
votes, the fund may sell foreign exchange to a member

a. the Treasury Stabilization fund or fiscal agent of
member governments;

b. the Central Banks, only with the consent of the mem-

country to facilitate transfer of capital or repayment or ad- ber of the Board representing the country in question;
justment of foreign debts. and

6 and 7. When a creditor country is “getting fed up,” ¢. any international bank owned predominantly by mem-
and the fund’s holdings of the currency of the creditor coun- ber governments.

try drop low, the fund may make representations to the But the fund may nevertheless, with the approval of the
— member of the Board representing the country concerned

* The text of the Morgenthau plan appears in full in the New ; 1 frag 1 :
York Times of April 7. 1943. The Kees plan toxt is isnued by sell its own securities or securities it holds directly to the

British Information Services, 30 Rockefeller Plaza, New York, dated public or to institutions of member countries.
Aprii 8, 1943. The foregoing statement, a compression of the United


===== PAGE 2 =====

488 Vital Speeches of the Day

States Treasury proposal, omits a number of qualifications of foreign commerce. An American exporter selling goods
on these powers. to France for French francs obviously wishes to know how
Both plans propose to introduce a new unit of value, a many dollars he is going to get for the francs when he makes
new money, in terms of which the international bank’s ac- his contract. If he is to be paid in francs at the end of three
counts are to be kept. The Keynes plan calls it “Bancor,” months, and is afraid that the francs will be worth very
probably a combination of the word “banco” and the French many less dollars at the end of three months than they are
word for gold, “or”—with a context, however, which makes today, he will hesitate, or he will ask the French importer to
one very sure that whatever else it is, it isn’t gold. The Mor- pay him in dollars. But if the French importer is afraid that
genthau plan new unit is called “Unitas.” But this is given the dollars will be very much higher in francs three months
a definite meaning. It is 137 1/7 grains of fine gold, equiva- later when he must buy them to pay for the goods, he also
lent to ten United States dollars. The books of the fund will hesitate, if he is a responsible man. International com-
are to be kept in terms of these international units—bancor merce is badly crippled by instability in foreign exchange,
for the Keynes fund or unitas for the Morgenthau fund. just as the international commerce of the country is badly
The Keynes bancor is to be given a value, to be set by the crippled by violent fluctuations in the value of the domestic
Governing Board later, fixed in gold “but not unalterably.” currency. The country whose currency is weak and slipping
Both plans have provisions for restricting capital move- and fluctuating is a bad place in which to do business for
ments from country to country, and for preventing the either the foreign merchant or the domestic merchant.
withdrawal of capital previously placed in foreign countries.
Both plans contemplate international cooperation to prevent THE PLANS STRIKE AT SYMPTOMS, RATHER THAN UNDER-
these capital movements. LYING CAUSES, oF FiNaNciAL DisorDEr

But please observe in this connection that the instability
-NATI RAIN-T w AUTHORITY . . .
SUPER-NATIONAL BRAIN-TRUST WITH AUTHO In rates of exchange betweeen countries one of which has

good money fixed in gold, and one of which has weak and
fluctuating money, is due to an instability in the money of
the weak country. The exchange instability is a symptom.
The currency instability is the cause. If you attack the ex-
change instability as your starting point, you are attacking
the symptom rather than the cause. Let us say, rather, that
you are attacking the symptom rather than a complex of
causes, because behind the instability of the weak and fluctu-
ating currency there lies a complex of causes, which include
the finances of the government of the weak country as well

Both plans set up a super-national Brain-T'rust which is
to think for the world and to plan for the world, and to
tell the governments of the world what to do. The Mor-
genthau plan contains some safeguards for the United States
not contained in the Keynes plan. In the arrangements for
voting powers, the Keynes plan would leave the United
States in a hopeless minority. The Morgenthau plan would
leave the United States with a vote of one-fourth the total
votes, still a minority, but it provides that on certain points,
notably an alteration in the rates of exchange, a four-fifths
vote shall be required, which would mean that the United 4 jis strictly monetary policy.

States with a one-fourth vote could interpose a veto. But Fixed rates in the foreign exchanges are eminently de-
the Morgenthau plan makes it the obligation of member sirable. A temperature of 98.6 in the human body is
countries (Section VI, 7) “to adopt appropriate legislation eminently desirable, but a rigging of the thermometer so

or decrees to carry out its undertakings to the fund and to that it will always record 98.6 regardless of the fluctuations
facilitate the activities of the fund, which would mean jn the temperature of a sick patient 1s a rather futile per-

that the fund could tell the Congress of the United States formance. And a rigging of the foreign exchange markets
what to do and that the Congress would be under obligation so that they will record fixed rates among sound and un-
to do it. With respect to this provision, VI, 7, there is no sound countries, regardless of a deterioration in the funda-
four-fifths vote of the fund required, and no veto on the mentals governing the values of the moneys of the unsound
part of the United States. countries, merely masks the facts of financial disease and

Bora PLANS ARE BRITISH PLANS— PURPOSES disorder, and defers the time when these fundamentals must
HIDDEN AND AVOWED be dealt with.
What are the purposes of this elaborate super-national THE WEAK PurLL Down THE STRONG

machinery? What is it designed to accomplish? What is
the need for it? Why did we never have it before? I may
say that there are a good many hidden purposes in the pro-
posals, purposes clear in the minds of the authors of the
Keynes plan, though I am not so sure that they are under-
stood by the authors of the American Treasury plan. Both
the plans are British plans in my opinion. Both of them
grow out of long trends in Keynesian thinking and in
British monetary policy. I believe that both plans grow out
of long discussions by the British financial experts and the SimiLar Prans Prorosep in 1921—A CLEARING HOUSE
representatives of the United States Treasury, that the ideas Tuar Courp Nor CLEAR
came from England and that our Treasury has accepted them
in major bart, though not in all. I shall discuss these hidden These Keynes and Morgenthau proposals look very novel
. . . today. The fact is however that similar proposals* were
purposes at a later point. But first I wish to discuss the Je duri h b dd ) f 1920.21
avowed and obvious purpose—that of keeping exchange rates Ac 1 uring oo postwar oom an do by b ~& i
fixed among the currencies of the different nations of the t that me, owever, they were not made by the financia
world. authorities of strong governments. One came from Signor
Tittoni of Italy, a country financially weak, with heavy

The Keynes and Morgenthau plans propose, in substance,
a pooling of the financial resources of the different countries
of the world, putting the strength of the strong countries
behind the weaker countries so that all of them appear strong.
All of the moneys, good, bad, and hopeless, look the foreign
exchange market level in the eye. Bad money becomes as
good as good money—and if the process is continued long
enough, good money becomes as bad as bad money.

Avowep OBJECTIVE TO STABILIZE EXCHANGE RATES

. . . . oe *See “Artificial Stabilization of Exchange Condemned—Outline
Now, obviously, it is a desirable thing to have stability of 5 Fundamental Solution,” Chase Economic Bulletin, Vol. 11, No.

in foreign exchange rates, from the standpoint of easy flow 1, January, 1922.


===== PAGE 3 =====

Benjamin M. Anderson 489

government deficits, with an adverse balance of trade, with ing from the state bank of issue, a great increase in taxation
a rapidly growing volume of bank notes, and with a very and a balancing of budgets, together with the fixing of a gold
weak gold reserve. He proposed a foreign exchange clearing parity for the currency and a resumption of gold payments at
house, a single clearing house controlled by the various gov- that parity. In some cases the old par might have been re-
ernments, which would monopolize all foreign exchange stored. In most cases new and much lower pars would have
transactions. It was sufficient then to point out, however, that had to be adopted. But in any case the fundamental cor-
the analogy with a clearing house could not apply. A clearing rections called for cutting public expenditures, cessation of
house is an association of solvent banks, every one of which borrowing, a balancing of budgets with taxes, and a cessation
is able to meet its deficit at the clearing house every day with of the printing of bank notes.

cash. The proposal was to create a clearing house that could But this was a very hard way. The finance ministers of
not clear. There were proposals of an international exchange each country were faced with the problem of millions of
bank which should have exclusive control of buying and soldiers returning without finding immediate work. They
selling of foreign exchange, and should buy foreign exchange were faced with demands for pensions; they were faced with
at a fixed rate. We described this bank in those days as a demands for funds to reconstruct the regions devastated by
bank “in which the United States would make the deposits war; they were faced with demands for funds to feed starv-
and Europe would get the loans.” We recognized that such ing people. The people were very reluctant to pay more
a bank could maintain exchange rates at a fixed point only taxes and to buy government bonds. The easy way was to
if the United States would supply unlimited dollars for pay- ask the state bank of issue to print bank notes, and to use

ing European exchanges. these bank notes in meeting expenditures of the state for
pensions and unemployment relief and rehabilitation of dev-

No New MACHINERY NEEDED IF FUNDAMENTALS astated areas. The people, in turn, could use the bank notes
ARE CORRECTED in bringing in foreign goods, as long as the foreign exchange

We knew on the one hand that unless the fundamental markets would take them.
causes of the weakness of the European exchanges were cor-
rected, the time would come when such a machinery would Kno oF Ovutsie Here Neepep—HEeLr ConDITIONED ON
crash, with a greater or less loss to us, depending on how INTERNAL REFORMS
many dollars we had fed into the machinery. We knew on Now these war torn countries in their distress needed
the other hand that if the fundamental causes of the ex- outside aid. We gave some of the weakest of them very
change weaknesses in Europe were corrected, no such inter- speedy outside aid through Red Cross activities, and we shall
national machinery would be needed, because the existing have to do this on a great scale again. But they needed, also,
financial machinery of the foreign exchange market would foreign loans carefully supervised by the lender and ex-
make the clearances and keep things straight. plicitly conditioned on drastic internal financial reforms. The

finance minister could then have said to his parliament and
THE Postwar Boom anp Crisis oF 1919-20 Due To to his people, “If we go on in our present course printing

ARTIFICAL SUPPORT OF FOREIGN EXCHANGE bank notes, running gigantic deficits, ruining our currency,
There was a further reason in 1921 why we gave scant ruining our credit, leaving our industry no good money to
attention and little respect to the proposals for bolstering work with, watching our productive activities deteriorate as
the exchange rates of weak countries at the expense of the our finances deteriorate, ultimate ruin is sure. If, however,
cash resources of the strong countries. We had just gone Wwe cut our expenses, raise our taxes, tighten our money
through a violent boom and a violent crash due to precisely markets, and stabilize our currency, our outside friends will
that thing. The postwar boom of 1919-20 and the crisis of give us loans which will put gold into our central banks,
1920-21 were due to artificial strength in foreign exchange which will give the treasury funds to aid immediate distress,
which masked the fundamentals and delayed the necessary and which will enable us to get on a self-supporting basis
reforms. again.

This episode is of high significance in understanding the
Keynes and Morgenthau proposals and in exhibiting their Suc HeLp GIVEN GERMANY IN 1924, HUNGARY IN 1925,

vices, weaknesses and dangers, and I wish to give an outlihe Poranp 1¥ 1927—AmouNTs NEEDED RELATIVELY SMALL

account of it here. These things were done later after internal currency dis-
orders had brought about intolerable domestic conditions.
Financia DEMORALIZATION oF CONTINENTAL When the German mark had dropped to a trillion to one,
BELLIGERENTs IN 1919-20 Germany submitted to the Dawes Plan, submitted to outside

The picture on the Continent of Europe after the Armis- supervision, raised her taxes, cut her expenditures, restored
tice in 1918 was roughly this: great public debts had been her currency to a gold basis and started up again. Austria
created during the war; the governments had borrowed from submitted to a similar drastic change of policy when the
the people and had taxed the people, but had done both in- crown had dropped to one fourteen-thousandth of its pre-war
adequately. They had leaned heavily on the state banks of value in 1923. Hungary, in consideration of a loan, in 1924
issue, the central banks, and the central banks, responding adopted drastic internal financial reforms, stabilized its cur-
to the war needs of the government, had issued bank notes rency and submitted to foreign supervision of its internal
in gigantic quantity. They had ceased at the outbreak of finances under Mr Jeremiah Smith of Boston. Poland in
the war to redeem these bank notes in gold. They had 1927, in consideration of a foreign loan, engaged in a similar
fluctuating irredeemable paper money. The revival of pro- house-cleaning and submitted to outside financial control
duction and export in great industrial countries was sadly under the supervision of the Honorable Charles S. Dewey
hampered by this. An agricultural country can resume its who left the United States Treasury to take the job, and
activities as men go home to their farms, despite bad public Who had power to countersign the expenditures made of the
finance and bad money, but great industrial countries are proceeds of the loan, to see that they were used for the
heavily handicapped by such a situation. purposes agreed upon. In all these cases, the loans did good,
What was called for was a cessation of the public borrow- and in all these cases, the figures were relatively moderate.


===== PAGE 4 =====

490 Vital Speeches of the Day

The biggest of these loans, the Dawes Plan loan to Germany and, second, to the continuance of loans by the Treasury to
in 1924, was approximately two hundred million dollars. European governments through June 30, 1919. This support
The Austrian, Polish and Hungarian loans were very much was enough to stop the postwar liquidation and reaction and
smaller. Outside help, outside money, conditioned on outside to turn us from reaction into a violent boom. Our exports
supervision and drastic internal reforms, did good. and our export balances grew by leaps and bounds. We
continued to drain the country of goods, and at rising prices.
But BirrLions FIRsT WASTED IN SUPPORTING FOREIGN Our export balance of January, 1919, was 410 million
Excrances iv 1919-20 dollars. Our exports continued on a gigantic scale. In June
But these remedies, you will observe, came in 1924 and our export surplus rose to 625 million dollars, of which 592
1927. The first help came in a form that struck directly at million dollars was to Europe alone. In the year and seven
the foreign exchanges, and billions were wasted in 1919-20 months, January, 1919, to July, 1920, inclusive, we sent
in a futile supporting of the foreign exchange rates, which Europe six billion 350 million dollars worth of goods more
merely deferred the problem and allowed the finance minister than we received back from her. The Continent of Europe
to go on with his reckless borrowing from the central bank was flat on its back, was buying without limit of price or
and his reckless spending. quantity all that she could get from us with her rapidly
There were four causes of the undue strength of the for- increasing paper money offered in the foreign exchange mar-
eign exchange rates of Continental Europe in 1919 and 1920. kets.
Of course we had a boom. Of course prices rose. Com-
modity prices had reached a peak of 207% of pre-war prices
ArmsTics To Marc 20, 1919 AND SUPPORTED Aue vember, 1918. They reacted eas down to
Avviep Excrances UnTic Jury, 1919 March, 1919. Then they turned up under the influence of
The first was continued loans by the United States govern- this terrific selling to Europe on credit to a new high of
ment to the governments of our Allies in Europe. Our 248% in May of 1920.
Congress in 1917 had authorized the Treasury to lend our Funds drawn from the United States Treasury to support
European Allies ten billion dollars. Approximately seven bil- the exchanges will account for nearly three billion dollars of
lions of this had been loaned by the time of the Armistice. this. Where did the rest come from? Again, from the undue
Nearly three billions more was loaned between the Armistice strength of the Continental exchanges. There was another
and June 30, 1919. In the first four months after the factor in the strength of the Continental exchanges which
Armistice this money was used definitely in pegging sterling does not and cannot exist today. This was the prestige of
exchange. The firm of J. P. Morgan, acting for the British governments and of paper moneys among the peoples of the
Government, and using the dollars drawn from the United world. Governments had kept faith in pre-war days amaz-
States Treasury, was buying all the sterling offered in the ingly well. Governments had been responsible. It was not
market and holding sterling at a fixed rate. Others of our believed that the government of a great country would let
European Allies were receiving loans also from the United its currency deteriorate indefinitely. When exchange rates
States Treasury, which they used in supporting their cur- went low, speculators and even financial institutions over the
rencies in the foreign exchange markets. We had in the first 1d were disposed to look on them as bargains and be-
four months after the Armistice exactly what the Keynes [ieved that they would come back.
and Morgenthau plans would seek to accomplish in the next
postwar period—the actual pegging of exchange rates by Britain Takes Over THE Loap WHEN OUR GOVERN-
using funds lent by the strong country, the United States. MENT Drops Our, 1919-20
Four months after the Armistice J. P. Morgan & Com-
pany announced that they would no longer buy sterling and
there was a sharp drop in the price of sterling exchange and
in the exchanges of all the Continental countries. But the
Continental currencies continued to be far higher in the
foreign exchange markets than the fundamentals justified.
The loans from our government to European governments
continued to provide funds with which these currencies were
artifically supported, even though not actually stabilized.*
The post-Armistice strength of the foreign exchange rates
was due, first, to the actual pegging of exchange for over
four months with funds drawn from the United States
Treasury and handled through J. P. Morgan & Company

Loans BY U. S. GOVERNMENT PEGGED STERLING FROM THE

With the cessation of our Treasury loans to our European
Allies, it seemed a reasonable expectation that the currencies
of the weaker countries would go down rapidly and their
ability to buy from us would speedily cease. Of all the
belligerents of Europe, Great Britain only had got her fi-
nancial house in order. She was balancing her budget. She
looked forward to the return to gold at the old par. Con-
fidence in Britain was high throughout the financial world.
There was increasing concern in New York regarding
France, Italy, Belgium, and virtually all the other belliger-
ents of Europe. But the buying power of the weak countries
continued and although the exchange rates went lower, they
all moved together. Sterling weakened with the other ex-

*1 think it proper to say that virtually all of the pest-Armistice changes, and the other exchanges continued abnormally
loans were used in this way. There was the need for dollars to Strong. Our boom went on. Exports continued, not only to

liquidate the cancelled war contracts between European govern- Britain but also to the Continent. Prices in the United
ments and American industries But Europe had at the beginning States continued to rises.

of 1919 approximately seven hundred million dollars of American :

balances growing out of loans that had been previously made by The explanation finally became clear.

our government. The cancelled war contracts required somewhere . The point was that England had interposed her vast finan-
between a half billion and a billion dollars. At the most, Europe cial strength and financial prestige between us and the
needed not over three hundred million of the post-Armistice loans Continent. * England was buying goods here with sterling or

to use for cancelled war contracts The present writer made a very : .
. : x ¥ with borrowed doll 1
careful study of this matter in 1920 when he was writing the Chase dollars to sell on the Continent for francs,

Economic Bulletin, Volume 1, Number 1, October 5, 1920, called lire and marks, and the British foreign exchange market was
“Three and a Half Billion Dollar Floating Debt of Europe to Pri- buying the francs, and the lire which came to our New York
vate Creditors in America.” This Bulletin together with the Chase ———

Economic Bulletin of February 28, 1921, called “The Return to * This point appears in print first in some paragraphs I wrote for
Normal” gives a very full account of the postwar boom and crisis, Commerce Monthly, issued by the National Bank of Commerce in
and the causes responsible for them. New York, January, 1920, pages 19-20.


===== PAGE 5 =====

Benjamin M. Anderson 491

foreign exchange market as we made direct shipments against had an immense increase in agricultural debt in 1919 and
francs and lire to France and Italy, etc. It was not a 1920. We would have done far better to have faced reality
pegging of Continental exchange, but it was a support of at the end of the war.

Continental exchange by the financial strength and prestige
of Great Britain. The boom went on until at last the de-
terioration of Europe's internal finances became unendurable, Second, I repeat, that all this vast credit to Europe used
until we and Britain both ceased to take readily the weak ex- In supporting the exchange did no good. Continental Europe
changes of the Continent, until we ceased to be willing to Was In far worse financial and industrial position at the end
increase our holdings of sterling or to increase our credits to of it than at the beginning. The finance ministers used the
England. Then we and England cut our losses, the boom €asy way so long as the outside world would take their cur-
was over, the great collapse came, American commodity T¢RCleS In the exchange markets.

prices dropped from 248 in May of 1920 to 141 in August Third, England had terrific losses. She would have done
of 1921, and the Continent of Europe was in worse financial far better to have made her readjustment in the winter of
position by far than it had been at the time of the Armistice. 918-19.

MvucHa SMALLER Loans, CONDITIONED ON FINANCIAL
RerorMs, WouLp HAveE SoLvED PROBLEM

Finally, very much smaller sums of money lent to Europe
with discrimination and care, and conditioned on adequate
OE ) . financial and currency reforms on the Continent, would have

“This would give everyone the great assistance of multi- turned the Continent of Europe up again, as indeed very
lateral clearing, whereby (for example) Great Britain mych smaller loans, carefully supervised, given to the weakest
could offset favourable balances arising out of her exports countries individually did turn the tide at a later date.
to Europe against unfavourable balances due to the United Very much smaller loans would have meant, for one thing,
States or South America or elsewhere. How, indeed, can that Europe would have bought only what she needed. She
any country hope to start up trade with Europe during the would have bought foods. She would have bought raw ma-
relief and reconstruction period on any other terms?” terials. She would have bought other things essential to set

It would have been very nice for England if the proposed her industries going. She would have developed her indus-
Keynes or Morgenthau arrangements had been in existence trial power and her power to export and would have been in
during the boom of 1919-20, when England was buying in 2 Position to send us a back-flow of manufactured goods in
the United States with dollar obligations and sterling, and return for the needed foods and raw material. As it was she
reselling at what looked like a profit to the Continent for Sent us, through the whole of this period, a pitifully small
francs, lire, marks, and so on. As things were she gave us volume of goods, and she bought from us a high percentage
her good dollar obligations and her pretty good sterling for of the manufactured goods which she ought to have been
the goods we sent, and she got the bad francs, lire, marks, producing herself. Our exports to Europe in 1919-20 ran
Greek drachmae, etc., in exchange for the goods. Her ex- VeIY high in finished manufactures, including luxuries. The
pected profits turned out to be losses. But if there had only expisode did nobody any good. It weakened the world.
been an international fund into which she could have poured The Keynes and Morgenthau plans, if carried through,
the francs and the lire and the drachmae as constituting would repeat this epiode, on a vaster scale. We should pour
liquidation in full for her sterling and dollar obligations to American dollars into the international fund which it would
the United States, and she had prudently remained net US¢ if supporting the exchanges of all weaker countries.
debtor to the fund, then she would have had her profits clear We should i ort goods. We should have a boom based on
of risk. We should have given up goods, and we should have i € export 0 goods We should finally “get fed up” with the
received in return a share in an international fund diluted rains on our dollars. We should cease to supply the un-

! . limited dollars. The fund would deteriorate. The ex-
and deteriorated by bad drachmae, bad franc and bad lire. changes would crack. The exports would drop violently,

Loans To Support ExcHanGe Dip No Goop

ONE oF Lorp KeyNES's HIDDEN PURPOSES

The Keynes plan is evidently drawn with some recollection
of this episode in mind. Section 14 of the Keynes plan offers
as an argument for the plan that

WE Stoutp Have HAD oUR READJUSTMENT and we should have another crisis of 1920-21.
AT THE END OF THE WAR The Keynes-Morgenthau plan puts the cart before the
horse. It strikes at the symptom. It does not deal with the

Now there are a number of things to be said about this
episode. The first is that we should have done far better to
have taken our licking at the end of the war than to wait KEYNES AND MORGENTHAU versus THE RED Cross

for nearly two years to get it. Everybody was braced for Now we must recognize frankly that there will be coun-
reaction and liquidation when the Armistice came. Our tres on the Continent of Europe so stricken, so demoralized
industries and our banks were financially strong. Read just- after the war that they will have no credit with which to
ment would have been severe but nothing like as severe as it buy goods, and that we and other countries which have sur-
was when it came two years later. pluses must engage in an immense act of charity to help keep

After our government Ceased to support the exchanges, them alive. We should do this by Red Cross methods and on
private creditors in the United States provided an additional Red Cross lines. We should not call it loans because we

three and a half billion dollars® to pour into the vortex. We (hal not get the money back. We should call it gifts and

had immense expansion of bank credit in financing the export charity. We should know exactly what we are doing and we

trade on credit, and in financing the accompanying boom }oy1d mark it off our books forthwith.

phenomena in the United States. We had a frantic specula- We should limit the amount of it. We cannot feed the

tion in farm lands, centered in Iowa, that would not have (111d. We cannot support the world. We can help. In

occurred had the reaction come following the Armistice. We every country, from the beginning, the government should
*“Three and a Half Billion Dollar Floating Debt of Europe to J¢ €PcOUraged to be responsible, and their own people should

Private Creditors in the United States,” The Chase Economic Bul- be expected to do the main job. Of course the standard of
letin, Vol. 1, No. 1, Oct. 5, 1920. life in Europe will be low when the war is over. Anyone

fundamentals.


===== PAGE 6 =====

492 Vital Speeches of the Day

who supposes that the world can go through the devastation to importers checks their purchases of foreign goods. Imports

of this war, and come out with a high standard of life, is are reduced. The restriction of credit to exporters hastens

dealing in fantasies. the sale of goods to foreign countries and compels them to
The Keynes-Morgenthau plan would make Red Cross make the necessary price reductions to get goods out.

work unnecessary-—for a time. The weakest and most deva-

stated of the Continental countries would have its quota in IEYNES-MORGENTHAU PLAN DoEs Nor REQUIRE BupGeT

the international exchange stabilization fund. All countries BarancinG or Firm Discount RATES

would start with drawing power upon this fund. Under Now, both the Keynes and Morgenthau plans have some
these circumstances the Finance Minister of each country suggestions as to dealing with weak countries which are
would feed his own people instead of calling on the outside using up their quotas too rapidly, and general statements
Red Cross. He could do it by printing bank notes, and while regarding appropriate measures which the fund may take,
the quota lasted no Red Cross would be needed. but neither of them says anything about balancing internal
I would say that even in giving Red Cross aid to a stricken budgets and neither of them says anything about firm dis-
country, we should make strong representations to the gov- count rates to protect a currency.
ernments of those countries directed toward the rehabilita- On the contrary, it is in the spirit of both plans to make
tion of their internal finances and currencies. Gifts, as well these unnecessary, as the following two sections will show.
as loans, should do the recipient permanent good.

BotH MORGENTHAU AND KEYNES PLANS ARE CHEAP
Boru KEYNES AND MORGENTHAU PLANS PuT THE MoxEyY PLANS

Borrowers IN CoNTROL OF THE LENDING High interest rates are anathema to Mr. Keynes and high
Both the Keynes and Morgenthau plans put international interest rates are anathema to Mr. Morgenthau. Qur pres-
lending into the hands of debtors. ent government borrowing policy in financing a great war at
The one great country which will be in a position to ex- rates of interest exceedingly low are made possible only by
tend credits in the postwar period will be the United States. a constant expansion of bank credit. Money can be got at
Some other countries, as Sweden, Switzerland, and the Ar- these low rates from the banks, but cannot be got from in-
gentine may be in a posion to give some credits, but the vestors in adequate volume at these rates. The low rates of
majority control of the fund would be in the hands of the interest on bank loans, moreover, are made possible only by
debtors, including Great Britain, even though the Morgen- continuing purchases of government securities by the Federal
thau plan reserves a veto on certain points for the United Reserve banks themselves, enlarging the base on which bank
States. Strong and weak alike, debtor and creditor alike, expansion takes place. Our pre-war policy from 1933 on,
pool their resources and the debtors decide how to lend them. following Lord Keyne’s monetary philosophy, was of the
Now this, I submit, is an unnatural and an unsound arrange- same character. Bank expansion was to supply the govern-
ment in principle. If credits are to be safe, the creditor must ment with money, and the banks had their reserves enlarged
be in a position to protect himself, and must be in a position by Federal Reserve purchases of government securities, by
to impose conditions that will make the credit safe. United States Treasury purchases of silver, and by gold
When a would-be borrower is strong and in a good credit flowing in from foreign countries. Lord Keyne’s objection
position he meets no unusual terms at his bank. Other banks to the gold standard, rests in large part upon the fact that
would be glad to have the business. But when a borrower is it is a restrictive standard. He wishes bank credit to expand
weak and needs emergency help, a bank, if it lends at all, freely against government deficit borrowing, because he sees
will make sure that there is such a reform in the borrower's no other way to make prosperity and full employment. The
position that the loan will be good and will do good. A bank, gold standard is a restrictive standard. It operates power-
a majority of whose board of directors are impecunious fully to hold undue credit expansion down. It compels read-
debtors to the bank and all of whom are eager to borrow justment and liquidation when unsound tendencies exhibit
more, would very speedily become a ruined bank. It is this themselves. That is to my mind one of its greatest merits.
kind of bank which both the Keynes and Morgenthau plans It is to Lord Keyne’s mind its great demerit.
would create. The Keynes and Morgenthau plans both would create
new currencies which would be additional to gold in the re-
We Snourp Do Our Own LenpiNG serves of the central banks or of the various government
If we are going to lend to Europe in the postwar period, treasuries. The liabilities of the international bank would
we should do it ourselves and not through an international function as if they were gold assets in the hands of the in-
institution. We should impose sound conditions to make the stitutions which held them. They would relieve pressure on
credit good. We should not impose selfish conditions. We money markets everywhere, and remove or reduce the neces-
should not impose capricious conditions. But we should im- sity for credit restraint through high interest rates.
pose conditions which will assure the return of solvency to
the borrower, the balancing of the borrower’s budget, and the INTERNATIONAL REDISCOUNT RATE AT 1%
stabilizing of his currency at a rate that can be maintained Finally we have the remarkable circumstance in connec-
against gold. We may well make specific gold loans to put tion with both these plans that the international bank is to
gold in the reserves of the central bank of the country we give its credit within the quotas without any charge at all
are aiding. We should simultaneously insist upon a money and that when quotas are exceeded, it is to give its credit at
market policy in the country, including firm discount rates, a discount rate of 1%. Now this from the standpoint of the
which will protect the gold. principles of sound central banking is utterly grotesque. A
The gold standard itself is a powerful deterrent to ex- central bank should have its discount rate above the market
cessive imports on the part of a country, and a powerful force rate. It should not make it possible for a member bank to
working for an adequate volume of exports. Under the rediscount in order to lend at a profit, and it should not
workings of the gold standard, an excess of imports tends to give free credit at all. But here we have created a new
drain away a country’s gold. The responsible central bank, central bank for the world, a new bank of rediscount for the
obliged to redeem its currency in gold, thereupon raises its world which, lending to central banks or government treas-
discount rate and restricts credit. The restriction of credit uries money which functions as ultimate reserve moneys,


===== PAGE 7 =====

Benjamin M. Anderson 493

lends part of it at no charge and the rest at 1%. No more land, during the war, with payments made in sterling, but
powerful instrument of world inflation could be devised. It with the sterling balances subsequently blocked so that they
would be an instrument for world inflation—an inflation could not be transferred.
which would move progressively until the stronger countries, I have been unable to get figures even approximating the
alarmed at the quality of the fund, and alarmed at the in- exact amounts, and I find a similar inability to get any esti-
flationary phenomena within their own borders, ceased giv- mate on the part of a great New York bank. My impression
ing credit to the fund, pulled up, and cut their losses. is, however, that the volume of this has grown rather than
It is not to be expected that a fund constituted in this diminished during the war, and that restrictions on foreign
way, and managed by the debtor countries, would impose exchange transactions in England, and ever growing restric-
any adequate restrictions on fiscal deficits within the member tions on the transfer of foreign owned balances from one
countries, or require firm money rates within the member account to another, have tied up these funds in great volume
countries. so that the outside owner cannot use them. He cannot get
“ABNORMAL WAR BALANCES” gold out of England for them. He cannot exchange them in
The term “abnormal war balances” as used in the Morgen- England for the currency of his own country, and he cannot
thau plan is not defined. I am assuming that it has the same ¢€ven sell them in outside markets for whatever figure they
meaning as the term “abnormal balances in overseas owner- Will bring. They are blocked.
ship held in various countries at the end of the war” used Now we are similiar holders, in much greater amount, of
in section 34 of the Keynes plan, which follows: money which came to us for safety from Europe as Hitler's
“The position of abnormal balances in overseas owner- strength grew. Much of it came to us in actual gold. And
ship held in various countries at the end of the war much gold came to us under Gresham's Law after our de
presents a problem of considerable importance and spe- facto stabilization in early 1934. We had, to be sure, a very
cial difficulty. A country in which a large volume of imperfect gold stabilization, but England had none at all,
such balances is held could not, unless it is in a creditor and gold left places which were more unsafe to come to a
position, afford the risk of having to redeem them in Place which looked safer.
bancor on a substantial scale, if this would have the “Hor MoNEY”

ing i . A . ‘
effect of depleting its bancor resources at the outset. At In the period from 1931 on there was a great deal of “hot

the same time, it is very desirable that the countries Ta umpine about § ! I
owning these balances should be able to regard them as MOREY, nervous money, jumping about irom place to place
liquid, ar any rate over and above the amounts which seeking safety. The origin of this money was in the excessive
they can afford to lock up under an agreed programme bank expansion of the 1920s. Bank balances had risen tre-
of funding or long-term expenditure. Perhaps there mendously under the cheap money policy of the wo 20 ¥
should be some special over-riding provision for dealing terling na Th over-expanded. Ii 9 ntis § an a
with the transitional period only by which, through the made loans which created new sterling deposits far in excess
aid of the Clearing Union, such balances would remain of what was justified by the gold had oe posts of the
liquid and convertible into bancor by the creditor coun- B ank of England, and foreigners ad got Jo d of these
try whilst there would be no corresponding strain on the sterling balances broad England had spent t ded abroad or
bancor resources of the debtor country, or, at any rate, ad 1920 them abroad. € lar deoogit ¢ Te it In
the resulting strain would be spread over a period.” the , Creating very excessive dollar deposits, and a great

many of these were in foreign hands because we had made

ANoTHER HIDDEN PURPOSE excessive dollar loans to foreign countries.

We come here to one of the hidden purposes of the Keynes When the foreigner tried to cash in these excessive British
plan which our Treasury has swallowed whole, and for liabilities for gold in 1931, England quit paying gold and
which our Treasury plan has worked out a definite solution. went off the gold standard, but the balances remained on the
Lord Kevnes is here proposing to transform Great Britain books of the British banks and the balances even grew as
from the position of a very embarassed debtor to the position gold came to England from India and other places to buy
of a strong and aggresive creditor, at the expense of the sterling when sterling went low. The excessive amount is
United States. What are these abnormal balances which due primarily to the excessive expansion of credit in the
debtors must not pay back to their owners, but which the "20s. The nervousness of the funds is due to the deteriora-
owners are somehow going to be able to use as if they were tion in quality of this excessive credit, and to the abandon-
liquid cash? How were they created? By what right can ment of gold.

they be withheld from their lawful owners when the war If, after the war, England removes exchange restrictions,
is over? England is one great debtor of these balances. The and the owners of these balances are free to sell them for
United States are the other. what they will bring, the fear is that sterling will break to

BRITAIN’ EMBARRASSING Brockep DEBTS very low levels. The fear is that England will not have
} ‘ oe : enough gold to protect sterling except at very low levels.
British banks held large deposits in sterling when the war The fear is that England will have to turn to the United
broke out, due to foreign central banks in the so-called States for financial aid, or may be obliged to deal with Credi-
sterling area i. e. the British Dominions on a sterling basis tors whom she cannot pay, as an embarrassed debtor usually
and Scandinavian and Baltic countries which had followed does. England 1s proud and does not wish to occupy this
England off the gold standard and had chosen to let their position.
exchanges fluctuate with sterling. They believed, as a matter
of course, that they could sell their sterling balances at any THE Funp To TAKE OvER Britain's DEBTS
time, expecting them to be transferable freely on the books The proposal therefore in the Keynes and Morgenthau
of the British banks at the order of the owner of the balances. plans is that the international bank shall take over these
These “abnormal balances” include refugee money. In abnormal balances for prolonged periods. and create new
part they represent gold that was sent by confiding outsiders credits in bancor or unitas which the countries who hold
to England to be sold in the British gold market for sterling. these balances in England may use as liquid cash for inter-
In part they are supposed to represent goods shipped to Eng- national purchases. England, relieved of the pressure of


===== PAGE 8 =====

494 Vital Speeches of the Day

these debts would then be in a strong position. The pro- with respect to these abnormal balances. They belong to
posal is further that the governments of the world shall unite their owners. We have plenty of gold. We can pay them
to prevent capital transfers, making it somehow discredit- and we should pay them even if we tighten our money
able for creditors to want their money. And the proposal markets in the process.

would put us, with our gigantic sums of gold, in the position Something must be done toward creating a new confidence
of practicing the same thing, because we also hold these in the world that great governments and central banks are
“abnormal balances.” going to respect their obligations and do their best to pay

them. We must not create a great international financial
By WHAT RicHT CAN WE or BRITAIN REFUSE TO PAY machinery the purpose of which is to let bankrupts ride with
Our INTERNATIONAL DEBTS? heads high on the shoulders of the solvent.

Now, I ask by what right the United States could refuse
to pay in gold those foreigners who have trusted us with - :
their nervous money, or those who have sent us their gold The provision of the Morgenthau plan goes into great
to escape Hitler? There is supposed to be a great deal of detail for dealing with these “abnormal balances.” Countries
gold of the Bank of France in the United States. By what are to cooperate to prevent their being transferred, but the
right could we withhold it from the Bank of France in a countries which own them may sell them to the international
France under a government recognized by our government? fund, and the international fund is gradually to be paid off
By what right can England withhold the funds which came Up to 80% of these balances by the end of twenty-three years,
to her from the sterling bloc which she so encouraged after at which time 1t will still hold 20% of them. The inter-
she left the gold standard? British financial writers have national fund is to get 2% interest on the balances it holds,
even scolded this sterling bloc. I quote the following from one-half paid by the country which sells them and one-half
the London Economist of September 2, 1939, page 452. paid by the country which owes them. The volume of inter-

“The fall in sterling is an international as well as a national currency, unitas or bancor, will thus expand against

domestic problem. Its international character has al- these illiquid balances at a discount rate of 2%. 1
ready been reflected in the realignment of currencies Our Federal Reserve system is allowed to take commercia

formerly adhering to the fairly compact sterling bloc, P2PCT running only sixty days. In general, central banks are
of which the details will be found in a subsequent note. supposed to take only the prime paper of the country in
All that need be said of the incipient distintegration of which they operate and paper of a very short maturity. "This
the bloc is that it is unfortunate in so far as it may be international bank of rediscount is to give credit at 2% on

the prelude to increased exchange instability, but that rwenty three year loans and hold 20% hy! the loans indefi
from the point of view of sterling it is not an unmixed nitely therearter. ¢ violation of sound financial principles

evil. For some years past the British Exchange Equal- could hardly go further.

isation Account had found to its cost that the adherence Tur CoMPOSITION OF THE INTERNATIONAL Funp—How
of certain foreign countries to the sterling bloc had been Tue Funp WouLp Work

a factor of instability and not of strength. Many sterl-
ing bloc countries have panicked into and then out of
sterling with the abandon of the most highly-strung
speculator. Some of the hottest of London’s hot money
has consisted of the sterling reserves of the sterling bloc,
and their partial disappearance will not be altogether
a loss.

ILLiQuip AsseTs FOR CENTRAL BANKS

The Keynes bancor fund starts out with neither assets nor
liabilities. At the opening of its books on the first morning
of its existence it would show assets of zero and liabilities
of zero. We may assume that the transactions on the first
day involved the sale to the fund by the Stabilization Fund
of the United States of ten million dollars worth of French
francs, francs which had been created by the export of goods

There are various comments to be made on this passage. from America to France, in the form of an order to pay
One is that it is evidence enough that there is no stability in francs drawn on a French importer, a bill of exchange. These
a currency unanchored to gold, and that the British Equaliza- francs were then sold by the American exporter to his bank,
tion had found this out to its cost for several years before which in turn sold them to the Federal Reserve Bank, which
the outbreak of the war. But the other is that it throws in turn sold them to the Stabilization Fund, which in turn
light upon the character of these abnormal balances which sold them to the international fund. The international fund
Lord Keynes and Mr. Morgenthau propose to relieve Eng- would pay for these francs by giving a deposit credit in
land of the necessity of paying. bancor to the United States Stabilization Fund equivalent

Gold is supposed to have come to England after the in- to ten million dollars. We may assume that the fund
vasion of Norway from the Central Bank of Norway, car- would then sell the francs it had purchased to the Bank of
ried through the streets of Oslo in small amounts, and taken France, requiring payment in bancor. The Bank of France
out in small ships. May England withhold this from the has no bancor, but it has an overdraft privilege with the
National Bank of Norway as an “abnormal war balance” fund. The fund thereupon debits the Bank of France in
when Norway seeks to resume her strength? Or may Eng- bancor in an amount equivalent to ten million dollars, and
land force the National Bank of Norway to take instead of turns the francs over to it. If these are the only transactions
the gold a dubious credit in an international bank in terms of the day, the books of the international fund would show
of “bancor” or ‘“unitas” for part of it? at the end of the day deposits in bancor equivalent to ten

The world will have great confidence in the long run million dollars due to the United States Stabilization Fund,
future of Great Britain when this war is over and we and and loans (or overdrafts) to the Bank of France equivalent
Britain are victors. The world will show forbearance for to ten million dollars in bancor. The books would balance.
England’s financial difficulties if England faces them We should be creditor to the fund, France would be debtor.
squarely. Let England pay those who have trusted her, if What could we do with the bancor? We could not get
she can. If she cannot, let her tell her creditors the facts gold for them. The fund has no gold and in any case the
and let her ask their indulgence and let her make agree- Keynes plan provides that the bancor shall never be redeemed
ments with them. in gold. We do not want the one asset which the fund has,

We for our part are entitled to no indulgence whatever namely, a loan in bancor to the Bank of France. The only


===== PAGE 9 =====

Benjamin M. Anderson 495

use we could make of our deposit in bancor is to transfer stood, namely, that to the extent that our Federal Reserve
it to the central bank or the exchange stabilization fund or bank or our Stabilization Fund handles the foreign exchange
the treasury of some other country to which we happened transactions of the country through the international fund,
to owe money, and which was also a participant in the fund. we affect our domestic money market in an undesirable man-
There would presumably be no such country when the fund ner. If we are exporting heavily, and our Stabilization
started. Very speedily the fund would accumulate a big Fund is buying foreign exchange here to sell to the inter-
balance sheet, as we exported goods to weak countries, re- national fund for unitas deposits, we are simultaneously cre-
ceiving our pay in bancor deposits on the books of the fund, ating additional bank reserves in the United States, and
and the fund took in the liabilities of the importing countries. making the money market easier. If the Federal Reserve

A fund starting with nothing is rather more than Mr. Banks buy foreign exchange they pay for it with checks on
Morgenthau could stomach, evidently. He wanted a fund themselves, and the effect is the same as if they were buying
with some real resources. He had provided that the fund shall government securities or acceptances or anything else. These
be constituted by each country putting something in to start checks deposited in member banks are by them re-deposited
with. The fund is to start with at least two billion five hun- in the Federal Reserve banks, increasing the reserve balances
dred million dollars, being half of the aggregate quotas of of the member banks, and making the money market easier.
the member countries which is to be not less than five billion The same thing is true if the Stabilization Fund deals di-
dollars. The amount to be paid in by each country at the rectly with the foreign exchange market. [ts assets are gold.
beginning should consist of 1214% of its quota in gold, It puts the gold or gold certificates into the Federal Reserve
1234 % of its quota in local currency and 23% of its own banks, to get the dollars with which to buy the foreign
(i.e. government) securities, except, however, that countries exchange. It pays for the foreign exchange with checks on
having less than three hundred million dollars in gold and the Federal Reserve banks and this increases member bank
countries having less than one hundred million dollars in reserves. The ability of the country as a whole to expand
gold need provide initially only 734% and 5%, respectively, credit at home increases the more we extend credit to for-
of their quotas in gold. eign countries.

Mr. Morgenthau’s fund is thus a curious mixture of assets This obviously suggests that something is wrong. The
and liabilities. The gold put in, and the dollars which we thing that is wrong is for central banks or governmental
should put in would be assets of the fund, from the stand- stabilization funds to be the main instrumentality in foreign
point of the international balance sheet, exceedingly helpful lending. If member banks buy foreign exchange, paying for
to the fund in meeting liabilities. The French francs, Greek it with deposit credits, they increase their deposits while their
drachmae, and pounds sterling put into the fund would reserves do not increase, and their ability to lend further is
hardly be elements of strength from the standpoint of the diminished thereby. This is as it should be. We ought not
international stabilization of exchange. The bonds which to buy too much foreign exchange. We ought not to export
the government of France and the government of Greece put too much on short credit. The really desirable way to get
into the fund would serve to dilute the fund rather than to needed money for foreign countries is not to get it from
strengthen it. But in all events, Mr. Morgenthau would either the banks or the Federal Reserve Banks or the Stabil-
have an aggregate of gold and pieces of paper all of which ization Fund, but to get it from private investors out of the
he could measure in dollars, and all of which he could savings of the people. We ought not to finance a one-sided
measure in unitas. flow of exports on short credits. Long credits should be

The operation of the fund under Mr. Morgenthau’s plan given by investor's money, under carefully restricted condi-
would be essentially like those under the Keynes plan. If tions as indicated above.
we sold French francs, we would get unitas deposits as

: J N 53 N N 5
credits. The Bank of France buys francs from the fund and OUTLINE OF A FUNDAMENTAL SOLUTION

gets a loan in unitas or it has an overdraft with the fund. I condemn the Morgenthau and Keynes plans in toto as
putting the cart before the horse, as encouraging rather than
Two Kinps or Uniras Deposits checking unsound tendencies in Europe, and as introducing

The Morgenthau plan provides that deposits in terms of new unsound tendencies at home. We want foreign exchange
unitas may be accepted by the fund from member countries stabilization, but we can get it only as part of a much more
upon the delivery of gold to the fund, and shall be trans- comprehensive treatment of fundamental disorders. We must
ferable and redeemable in gold, and that the fund shall main- make foreign loans, but we must condition them on internal
tain 100% reserve in gold against all unitas deposits. I be- financial and currency reforms in the countries to which we
lieve that this last provision is quite impossible. Unitas de- lend. These loans should be made with investor's money
posits will arise whenever a creditor country sells foreign rather than with reserve money. The government has no
exchange to the fund, and gets credit therefor on the fund’s money except as it taxes the people, or as it borrows from
hooks. Unitas deposits must greatly exceed the fund’s gold. the banks or the people. The first financial aid must be
We should speedily have two kinds of unitas deposits, one governmental because the risks are too great for private
with 100% reserve redeemable in gold, and the other, the capital to be willing to venture. But as I have indicated
ordinary unitas, with a much smaller reserve of gold and above, the first aid should be Red Cross aid rather than
not necessarily redeemable in gold. The latter could be ex- loans. No loans should be made that are not good, and
pected to go to a discount as compared with the former. I none should be made without strict conditions.
think that the American plan has not been well thought out. The government must act first, not merely in Red Cross
The Keynes plan on this point has at least the merit of con- activities, but also in creating a strong, safe peace, a peace
sistency. All bancor are of the same kind, and all are of that we can believe will be permanent. Had we followed
dubious quality. Woodrow Wilson’s plan in 1919, we should have had such
i a peace. We should have had a strong and upright League

THe INTERNATIONAL FUND, AND Domestic of Nations which, combining strength with justice, would
Money Marker CoNTROL have pacified the world. The first foundation of interna-

The foregoing account of actual transactions in the plan tional credit must be a strong political settlement, not a

reveal a point which I think our Treasury has not under- financial patchwork.


===== PAGE 10 =====

496 Vital Speeches of the Day

Then, as a vital part of world reconstruction, we must posed author of the Morgenthau plan, that it is futile to
turn toward freer trade throughout the world, so that debtor look to the private investors to supply more than a small
countries needing to pay can pay with goods, so that creditor part of what capital is needed for the more urgent post-war
countries receiving pay can receive goods, so that the coun- reconstruction needs and that it must be handled by govern-
tries of Continental Europe, needing food and raw materials ments. In this same statement Mr. White refers to the
from us, can pay for them with dollars, not obtained by billions of dollars of foreign exchange needed for this pur-
borrowing but by working and sending us their finished pose. I think that the United States Treasury has come
manufactures in exchange for the raw materials and foods. into an unreal world through the ease with which it has

At this point, I congratulate the Chamber of Commerce been able to borrow money from the banks in recent years.
of Los Angeles upon the endorsement which it has given to Money it can create this way. Capital is another story. And
Secretary Hull's request for a renewal of his power to nego- surely we must pull up speedily in this terrific use of bank
tiate reciprocal reduction of tariffs throughout the world. credit.

You have shown yourselves to be realists. We want to ex- In this connection, however, one thing is to be said. The
port goods and be paid for them by goods coming back. We bank expansion which has already taken place has put into
do not wish again to export vast quantities of goods against the hands of private individuals billions and billions of
promises to pay, and then refuse payment in the only way in dollars of bank deposits in excess of anything they ever previ-
which the debtor can pay, namely, with goods. The great ously held, and these funds would seek foreign investment
causes for the break down of international credit in 1931 at rates of interest that gave compensation for risk, under
were: conditions which tempted venture capital. Let the govern-
ment make a strong political settlement, let the government
open trade lines, let the government codperate with the bank-
’ . ers in seeing to it that reforms on the other side accompany
2. The great growing fabric of tariffs and other trade the offer of European loans on this side, and we should get

impediments which prevented the movement of goods investor's money for the rehabilitation of Europe. Foreign

and threw the whole burden of payment of interna- loans made in the '20’s were discredited by the disasters of

tional debts upon gold. ’31 and ’32, but foreign loans can be made good if we will
avoid the follies that we engaged in in the '20’s. And the
follies of the ’20’s would look microscopic if we adopted the
Keynes-Morgenthau plan.

1. The excess amount of such credit created by cheap
money policy in the "20's; and

Given real progress along these lines, however, I am satis-
fied that we can get investor's money in adequate amount
for the loans that Europe needs and ought to have.

I cannot at all accept the proposition recently made by * American Economic Review, Supplement, March, 1943
. . s s page
Mr. Harry D. White of the United States Treasury®, sup- 383. ’

Jobs, Freedom, Opportunity

THE FOUR ELEMENTS OF INDUSTRY

By F. C. CRAWFORD, President, National Association of Manufacturers; President, Thompson Products, Inc.
Delivered before the Fifth Annual Northern California Industrial Conference, San Francisco, Cal., April 13, 1943

bly lines of American industry. been carefully developed for a century and a half.

In the last two months I have seen victory in the By nurturing ingenuity, protecting inventive genius, re-
making in the bomber plants of the South, the shipyards of warding individual initiative and encouraging the investment
New Orleans bayous, the steel mills of Birmingham, the of savings in enterprises, we established American industry
tank factories of busy Detroit and the aircraft industry of as the healthiest and most vigorous in the world, and Amer-

T HE end of world aggression is rolling off the assem- outgrowth of long effort, the prime fruit of a plant that had

Southern California. ican standards of living the highest.

War production in February, according to the War Pro- But industry is not resting on its laurels.
duction Board, jumped 8 percent over the January figure and This year industry—labor and management working to-
is going higher and higher every day—already four times as gether—will produce more than 57 billion dollars worth of
great as in November just before Pearl Harbor. arms, ammunition and supplies—300 per cent over 1942's

This year we will launch the equivalent in tonnage of all record—the flood gates of production are wide open to sweep
the merchant marine in the world. aggression into oblivion.

Our plane production, still not big enough to assure vic- Industry will meet its 1943 war production obligations.
tory, is nearly as great as the rest of the world. Industry has confidence in its ability to deliver.

The fires of industry blazed so blindingly white in the Industry knew its own strength just after Pearl Harbor
swift conversion to war production that Mr. Roosevelt when it pledged to the president and the country that indus-
and other eloquent phrase-makers called the achievement a try’s production “will be limited only by the human endur-

“miracle.” ance of the men who man and manage its facilities.”
Industry has been called many things in the last ten years Industry is keeping that promise, and will keep that prom-
but this is the nicest name we've ever been called—“Miracle ise until the last Nazi has cried “kamerad” and the last
Men.” yellow son of Nippon has hissed “Banzai.”
But you and I who do not believe in miracles, know that Fighter and bomber planes to blast the enemies of democ-

it did not happen suddenly and inexplicably. It was a natural racy from the face of the north, and ships to supply the


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