The French Plan
- International Monetary Fund
- Published Date:
- February 1996
In May 1943 Messrs. Hervé Alphand and André Istel, with the help of certain studies made by one of the high officials of the French Treasury, put forward the plan reproduced below. The greater part of it was reproduced in The New York Times on May 9, 1943. A French version was published by the Bank for International Settlements as HS.99.
In the summary in The New York Times the proposed permanent institution was called an “International Clearing Office,” instead of a “Monetary Stabilization Office” as in the French version and in the English text reproduced below.
Suggestions Regarding International Monetary Relations (May 1943)
1. Preliminary remarks.
There is little doubt that a return to a generalized system of multilateral international trade, excluding foreign-trade control and foreign-exchange control, cannot be expected for some time after the end of hostilities. For numerous countries, a premature suppression of these controls would have ominous effects.
The states of Continental Europe, in particular, devastated by war and by the consequences of German occupation, will have first to feed their population, to import essential supplies, and then to reconstruct their capacity of production for national consumption and for foreign export. It is out of the question to let private importers, each acting independently, import foreign products without restrictions. By reason of the huge size of the requirements and the extreme urgency of some of them, the Government will have to control for a while both the volume and the nature of imports.
Foreign-exchange control will also probably have to be maintained for a while, not so much because of the considerable amount of internal capital requirements, but because it is difficult to visualize how rigid foreign-trade control can be enforced without exchange control.
Anyhow Russia will maintain, for an unpredictable period of time, both foreign-trade and foreign-exchange control.
Also ex-enemy countries will have, for a period of time, to be subjected, under United Nations supervision, to strict foreign-trade and foreign-exchange control.
It is thus necessary to conceive and achieve a practical system of exchange stability and of trade financing with the following characteristics:
- a) It must be applicable as soon as hostilities are over and even earlier wherever possible.
- b) It must be applicable simultaneously to those countries which will practice foreign-trade control and foreign-exchange control, and to others which will enjoy freedom of foreign trade and foreign exchange.
- c) It must be adaptable to the evolution of internal systems of exchange control and of foreign-trade control.
- d) Far from paralyzing evolution toward a better system of international economic relations, it should constitute in itself a step toward such a system.
2. Fundamental conditions of satisfactory monetary relations.
No international monetary system can work satisfactorily unless certain fundamental political and economic conditions are fulfilled. Military security and social order are of course paramount. But among the general conditions, it appears useful to lay particular stress on the following:
- a) Commercial treaties should be concluded permitting a rational distribution of productive activities among nations. Such a distribution ought to take into account the natural resources, the geographic and demographic conditions, the level of education as well as various other elements of the cost of production; it ought furthermore, to take into account the creditor or debtor situation of the balance of payments.
- b) Certain regulatory measures of an international character should be adopted, designed to stabilize business conditions and to reduce as far as possible the swing of economic cycles.
These measures ought to have a double character: they should operate on the one hand, on the volume of instruments of payment or of credit, in order to adapt them to needs; they ought to operate, on the other hand, directly on the volume of goods in order to adapt them to outlets.
This latter action should, itself, be of a double character: on raw materials, by some kind of regulatory action on stocks and output; on finished goods, by methods devised to accelerate or slow down the rhythm of production.
- c) International long term credits should be favored, and might consist, not only in traditional loans, but in direct participation of industry, agriculture, real estate, etc‥… through the establishment of national or international public or private Investment Trusts, or other forms of financing.
- d) Methods should be devised to remedy persistent disequilibria of balances of payments, through fundamental economic adjustments.
During the period immediately after the war it will be necessary to take care of permanent deficits in the balance of payments arising from reconstruction of devastated countries and development of backward countries. This is a problem of long term financing outside of the scope of the present memorandum.
3. Analysis of precedents supplied by previous monetary agreements.
Various monetary agreements entered in recent years supply interesting precedents and give useful indications concerning the requisites for satisfactory international monetary relations.
Among the most useful precedents, it appears worthwhile to mention the Franco-British agreement of December 1939 which was designed to stabilize the two currencies and to finance trade between the two countries during the war. Its distinctive feature was that the two governments agreed to acquire and keep, through their exchange equalization funds, at the official rates, the other country’s exchange offered through authorized channels. Thus was initiated, instead of the traditional method of financial assistance based on credits opened in terms of the money of the creditor country, a new method based on the acquisition by the creditor country of bank balances expressed in terms of the money of the debtor country.
The advantage of this new method arises in part from its flexibility; it arises also from the additional guarantee which it provides to the creditor country. Indeed, when a country opens to another a credit expressed in the currency of the creditor country, the creditor country holds exclusively a promissory note expressed in a currency which the debtor country might be unable to obtain for redeeming its debt. If, however, the creditor country holds the currency of the debtor country, it holds an internal purchasing power inside the country. True, it is conceivable that the debtor country might “freeze” its own currency owned by another country; but between friendly countries, violation of a promise not to “freeze” its own currency is a much more serious offense than failure to refund a foreign currency which the debtor country might be unable to obtain.
Several features of monetary agreements entered during the war were well suited to the special situation involved, but are not satisfactory for purposes of international financial collaboration in the future. Thus, the Franco-British agreement specified an unlimited mutual assistance, which implies risks unsuitable to a peace-time system; it specified also a prohibition of utilizing in third markets the other partner’s exchange, which constitutes a bilateral regulation incompatible with the multilateral character of international trade and credit.
4. Explanation of the proposed monetary system.
Let us assume that the principal nations, as in the case of the tripartite agreement of 1936, might conclude a monetary accord among themselves, to which the other United Nations might be invited to adhere, under certain conditions.
- a) This agreement would, in the first place, fix the official parities of the currencies of the participating countries; these official rates would not be changed without preliminary consultation (or preferably agreement) of the interested countries. A suitable mechanism of consultation (or preferably agreement) should be set up.
- b) The stability of exchange rates thus determined would be assured by the undertaking, on the part of the monetary authorities (either Exchange Equalization Fund or Central Bank) to acquire at the specified rate and to conserve, at their own risks, but with the limitations and guarantees hereafter specified, the exchange of other participating countries offered through authorized channels. (The word “authorized” applies to countries with foreign-exchange control.)
In order to facilitate to participating countries the relaxation of foreign exchange control, treatment, both as regards limitations and guarantees, should be made more favorable as control is relaxed.
- c) The foreign exchange thus acquired by the monetary authorities of the participating countries could be utilized for payments to be made in such currencies (purchase of goods, payments for services, payments of interests or dividends, purchase of securities, of real estate, etc.); it might also, under certain conditions, be sold to the monetary authorities of other participating countries.
- d) A limit would be fixed, for each participating country, of the amount of exchange of each participating country which its monetary authorities would agree to acquire, if offered, at the specified rate, and conserve if required.
While the limits should correspond to a reasonable amount of international trade, the authors of this memorandum have not attempted, at the present stage, to establish the basis of the determination of these limits.
- e) As a guarantee against loss arising from depreciation of its own exchange, each participating country would not only undertake to protect each other participating country against such loss, but would also agree to deposit, on demand, collateral (gold, foreign bills, raw materials, approved securities, etc.) up to a specified percentage (10 to 30% for instance) of the amount of its own currency held by the monetary authorities of another participating country. This collateral should be deposited with the monetary authorities (or warehouses, in the case of raw materials) of the country holding the currency, or a third approved country. Should the currency of the debtor country depreciate, additional collateral might be demanded, like in the case of commercial loans.
- f) The proposed monetary system, which amounts to the opening of mutual credits, undoubtedly entails inflationary risks. A method must therefore be devised to counteract, whenever considered advisable, the inflationary effects of the mutual purchases of exchange. The method suggested is a method of sterilization, which would work as follows:
In a normal period, the monetary authorities of a country holding the currency of another country would use this currency so as to favor flow of credit; for instance in the form of current accounts in commercial banks, of Treasury obligations, of discounted bills, etc. In periods of inflation, this currency would be kept in the form of an account with the Central Bank of the debtor country which would refrain from basing credits on them. Thus the debtor country would be enabled to maintain the foreign exchange value of its currency without losing the control of its internal circulation.
5. Optional constitution of a Monetary Stabilization Office.
To assure the smooth working of the system, it would be necessary that the monetary authorities of the participating countries should be constantly in close contact, either by means of periodical meetings or by setting up a permanent committee. It would probably be still preferable to establish a central board which might be called the Monetary Stabilization Office.
This Stabilization Office would keep account of all exchange transactions effected by the monetary authorities of the participating countries. It would not only facilitate clearings, but could also receive and scrutinize collateral. Furthermore, it would be in a position to know the balance of payments of each of the participating countries and thus to furnish valuable information concerning disequilibria of an accidental or permanent character, which should be corrected by financial or economic measures. Thus the Monetary Stabilization Office could serve both as a barometer of economic conditions and as a counsellor on economic affairs.
It should be noted, nevertheless, that the establishment of a Monetary Stabilization Office is not an essential condition for the operation of the proposed system.
6. The place of gold in the future monetary system.
Under the proposed system, monetary parities are fixed by mutual reference, and mutual credits are opened without movements of gold (except when used as collateral). However, the suggested system may be considered as a first step toward a general return to an international gold standard. Indeed, the establishment of fixed monetary parities,—even if tentative and even if affected by exchange control is tantamount to the adoption of a common monetary unit. Thus the link to gold of the U.S. dollar becomes a link for all other currencies also.
The role of gold could be enhanced by stipulating that any nation which so desired would be authorized to redeem in gold the credits received. Gradually, the various monetary units, as experience would show that parities are well established, could be defined anew in gold ounces.
Nevertheless, the place of gold has undergone deep modifications since 1914 and will remain considerably altered. Gold has ceased, for three decades, to be an instrument of internal circulation. Unlike platinum and silver, which have found new outlets in the chemical industry, gold has found none. So that its industrial use has been greatly reduced and has now become an infinitesimal proportion of an annual production which, in 1940, was three times as high, in dollars, as in 1920. The conception of gold as a “pledge” of internal monetary circulation has been pointedly criticized. Gold, however, has not ceased to be of valuable service for settlement of balances of payment between countries. It has also remained in use for the purpose of hoarding, notwithstanding administrative restrictions in most countries; such restrictions increase the risk of gold hoarding, but increase also its psychological attraction.
To sum up, use of gold is considerably restricted, while its world stock is now, in dollars, about four times as high as in 1914.
The facts themselves, in their evolution, seem to designate the new place of gold. Inasmuch as its stock, considerably increased, is in the hands of the monetary authorities of certain countries, predominantly in the United States, and inasmuch as its other uses have become insignificant, therefore its value depends mainly on the action of monetary authorities, particularly in the United States. The value of gold has thus become similar to the value of a fiduciary currency. Considering the difficulties which nations would encounter if they attempted to agree upon the adoption of a new international currency, is it not providential that they have at hand such a currency, consecrated by a mystic thousands of years old, in the form of yellow metal? Gold is the international currency of the future.
While gold should thus resume its role as an instrument of settlement of international balances and as a common monetary unit, its function as chief economic regulator should not be revived. The latter function should be exercised mainly through the concerted action of the competent authorities on the volume of credits and of goods. (It should be pointed out that the action of competent authorities on credits was already an inherent part of the traditional gold standard which, widely held opinion to the contrary, did not work automatically, but was managed through discount rates.)
It may be pointed out that the proposed system is intermediate between two systems which were widely in use in the period 1920–1940. Before Great Britain devalued in 1931, central banks customarily held currencies of certain other countries, without limit nor protection. Under this system, usually designated as the “gold exchange standard,” the Bank of France and the Netherlands Central Bank had accumulated large sterling balances. After the heavy losses thus incurred, monetary authorities adhered to the practice of requesting conversion into gold of the foreign exchange balances which they acquired. This system, usually called the “gold bullion standard,” was utilized in the tripartite monetary agreement, where each adhering country promised to redeem in gold, within 24 hours the amounts of its own currency acquired by the exchange equalization fund of another adhering country.
Both these systems are unsatisfactory. It is unreasonable, under the “gold exchange standard,” to expect one country to hold, without some limit and guarantee, another country’s currency. It is also unreasonable, under the “gold bullion standard,” to consider the currency of a friendly country as worthless. The proposed system does not, like the gold exchange standard, imply one hundred percent confidence in another country’s currency, nor, like the gold bullion standard, imply one hundred percent lack of confidence.
There seems to be no reason why the proposed system, or a similar one, could not be started immediately between the United Nations without waiting for the end of hostilities. The only real problem is to find a proper basis for fixing the limits of the amounts of exchange to be purchased. But should important difficulties arise in this connection, the system could be started nevertheless in an experimental way by fixing at the outset very low limits which could be gradually increased later.