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Professor Williams’ Key-Currency Plan

International Monetary Fund
Published Date:
February 1996
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Professor John H. Williams expounded his proposals for a “key-currency” approach to the problems of international monetary organization in two places. The first was at the end of a paper delivered at a joint meeting of the American Statistical Association and the American Economic Association on December 28, 1936; this was reproduced in The American Economic Review, Vol. XXVII, No. 1, Supplement (March 1937), pages 151–68. The extract (A) below consists of the final section of this paper. His second reference to the plan was at the end of his article entitled “Currency Stabilization: The Keynes and White Plans” in Foreign Affairs, Vol. 21, No. 4 (July 1943), pp. 645–58. Extract (B) below contains the final section of this article.

Both the paper and the article were reprinted in Professor Williams’ Postwar Monetary Plans and Other Essays, 3rd edition (New York, 1947), on pages 199–227 and pages 3–21, respectively.

(A) Extract from a Paper on “The Adequacy of Existing Currency Mechanisms Under Varying Circumstances” * (December 28, 1936)

I have presented the view, first, that there must be some form of compromise system, second, that this compromise should be one which will give the largest measure of internal monetary protection and control which is consistent with exchange stability, and third, that exchange variation, while not excluded, should be resorted to only when other means of control have been exhausted.

I want to conclude with three points which, I believe, have a special bearing upon the present trends and developments with respect to international monetary organization and policy:

  • The views expressed are not inconsistent with a keen and sympathetic interest in the new developments which have been growing out of the recent “gentlemen’s agreement.”
  • There are grounds for thinking that we do not need or want any single pattern of compromise in all countries, such as the gold standard pattern was before the War. Different kinds of countries require different kinds of monetary systems.
  • The best prospect for stability in individual countries and in the world as a whole, so far as it can be achieved by monetary means, lies in more efficient monetary control within the major countries, especially the United States and England, coupled with co-operation between them; and on this basis, there is no such dilemma between internal and external monetary stability as has been frequently emphasized in abstract analysis.

1. The “Gentlemen’s Agreement.” The gentlemen’s agreement is a form of de facto stabilization, less definite and binding than any which had been previously proposed and for that reason more acceptable and feasible. Whatever kind of system is ultimately to emerge, it has been commonly recognized that a trial period would be necessary before any more permanent and formal kind of stabilization could be ventured upon.

Moreover, the device—as set up under this agreement—for converting stabilization fund holdings of foreign currency into gold at a price that is based from day to day on the exchange rate may provide a new and better kind of exchange stability. Pressure on a currency will lead to its support through purchase by stabilization funds (or through sales of the other currencies) and to conversion of these balances into gold at a known price. If the pressure continues unabated it can be relieved by varying the exchange rate through varying the price of gold. With this instrument of flexibility at the disposal of the respective stabilization fund authorities, the result may be a greater assurance of exchange rates which are both more stable and more under control than has previously been the case. It will certainly make possible a more orderly change to new levels, if that is required; and it provides, moreover, a better possibility than we have previously had of effecting alterations in the exchange rate structure, of varying a currency with relation to some other without that change being communicated to all the others.10

It should be noted that, as it has thus far operated, this mechanism includes a fixed buying and selling price of gold in terms of dollars. Prior to the devaluation of the franc, the British Equalization Account operated against a fixed buying and selling price for gold in terms of francs. There is no evidence thus far that this kind of exchange stabilization can operate without being anchored to a fixed price of gold in one or more markets. In some respects, it would seem to be more feasible with only one, or a few countries, having a variable price of gold and operating against the fixed gold price maintained by the others. There is also the question whether operations cannot be conducted more effectively by one, or a few, stabilization funds rather than by a larger number. The objection to having one country on a variable basis, in this sense, and the others on a fixed basis is, of course, that it implies a large measure of trust in the integrity and the freedom from nationalistic motives of the variable exchange country which would act as the stabilizing agency. But perhaps the knowledge that other countries could retaliate by devaluation, either by new legislation or under an authority previously granted and held in readiness, might be a sufficient deterrent. The possible difficulty in having more than one stabilizing agency is, of course, that they might not be able to agree when any major change in exchange rates is desirable. England might think it desirable to put the pound down, but other countries might not think it desirable to have their currencies go up in consequence. Again it seems clear that nations could co-operate better on some plan of monetary control which leaves exchanges stable than they could upon a plan involving variable exchange rates.

2. Different Currency Mechanisms for Different Countries. The discussion of the gentlemen’s agreement indicates that it may be both desirable and feasible to have different currency mechanisms for different countries. Already there are included in (or attached to) the agreement countries with stabilization funds and a variable price of gold, countries with stabilization funds and a fixed price of gold and countries with a fixed price of gold and without stabilization funds. It may be an open question whether France, which now has the first type (but whose variable price of gold is limited by law within a range) may not, as Belgium did, return eventually to a fixed price of gold with no stabilization fund. And it may be a question whether the American fund will prove eventually to be primarily a gold sterilization fund or equally an exchange stabilization fund.

Some light can be thrown on the question whether the world needs a single, uniform system or a combination of different systems by consideration of the diversity of countries, and in particular the differences in their proportions of home and foreign trade. It would seem that the relatively self-contained countries should, in most circumstances, be less concerned about exchange variation as a means of correction of their business cycle maladjustments, and must rely mainly upon their powers of internal control. On the other hand, countries chiefly dependent upon foreign trade and foreign capital have most both to gain and to lose by exchange variation; they most need exchange stability when foreign trade is prosperous, and they most need a currency adjustment when capital inflow is threatening to produce a boom, or when depression in the outside world is threatening their foreign markets. From this point of view, countries like the United States, and probably France, could best afford to have an unchanging currency, once a generally sustainable structure of exchange rates had been attained. Countries like Australia or Argentina would probably want fixed exchanges the larger part of the time, but with some provision for both depreciation and appreciation. Currency appreciation would be indeed a new phenomenon in the history of young countries, which like most others have been less concerned to stop booms than to stop depressions; but currency depreciation in depression would be only repeating what they have always done. The only new suggestion is that it might be worked out in some more orderly and deliberate fashion, as a conscious instrument of policy. For such countries, internal money management must be at best the minor part of policy. Since these countries are a minor part of the world economy, currency variations by them would probably not hurt others so much as it might help them. In these countries, as in all, there would be some conflict of interests. Currency depreciation, which might help export trade, would impair ability to pay interest charges, but this sacrifice is at the expense of the foreign creditor, who may be more able to bear it and should have been better able to calculate the risk in the first place.

Consideration of countries largely dependent on foreign trade suggests consideration of the sterling area. The development of the sterling area when England went off gold represents the emergence, in a more limited sphere, of the same type of international trade organization and hence of the same type of monetary system that existed before the War, when in a very real sense it could be said that England was on gold and much of the rest of the world on sterling. Within such an area, among nations closely tied by trade and financial relations, the need for stability of exchange is so compelling that when the center country varies its currency it is apt to carry all the other members of the group with it. In such an area, also, as was largely true before the War, the monetary control exerted at the center is likely to have a powerful influence throughout the area, which suggests that through stable exchanges forces of expansion or contraction can be initiated at the center and be transmitted throughout the area.

To hold such a unit together and to maintain exchange stability within it, it is probably unnecessary that all the countries, or indeed any of them, should be on the gold standard. What the constituents of this area need chiefly are foreign exchange balances in London; and as the exchange stabilizing agency, what it needs is a sterling balance which the foreign country’s central bank holds and which this bank can control by decreasing or increasing its purchases and sales of sterling at a price that is stable but which it reserves the right to vary. If there is need of gold, it is as an internal reserve for notes or deposits, as a protection against an unrestricted credit expansion; but this function could be performed, also, as it can in other countries, by a central bank control of member bank reserves, without gold.

There is left for consideration those countries whose position is intermediate, whose foreign trade, though less in quantity or value than home trade, is nevertheless essential, in the long run, to a high level of productivity and real income. In this group are such countries as England, pre-eminently, and also Germany. In so far as such countries have trade areas, their concern for stability of exchange in support of their foreign trade has been already dealt with. Exchange stability within the trade area appears to be the less troubling aspect of their problem; and in a sense is self-insured by the closeness of trade ties. But there trade with the rest of the world is on a different footing. It is here that the conflict of objectives as between internal and external monetary stability chiefly arises. In depression, such countries are likely to strike out for freedom of internal policy, even though the protective devices which are set up, including currency depreciation, work out their effects at the expense of others. How their freedom of action is limited in other phases of the cycle, particularly by rising costs of imports, has already been discussed. Whether England would appreciate its currency substantially to help ward off an internal boom, we have yet to see. We must remember that she is occupied and perhaps somewhat complacent with her internal recovery, for which the ground was laid not only by cheap imports, but in addition by an easy money policy which is supporting both an extensive housing program (England having had no such construction activity as we had in the twenties) and now also a feverish armament program. The fundamental question at the moment, then, is whether England, in the light of her present situation, may not be less concerned about her foreign trade, which has been noticeably backward in the recovery, than in the longer run she will need to be. In considerable measure, the problem of monetary policy, in so far as there is conflict of internal and external considerations, is a problem of business cycle versus the longer run forces which govern national productivity and income. The question, as stated earlier, is how to control short-time change without doing damage to the basic trade relationships.

3. The Solution Mainly Turns on Internal Stability in the Major Countries, Coupled with Co-operation. The discussion of the sterling area suggests that for such a group monetary stability mainly depends upon the behavior of the center country. This suggestion has a larger application. The economic activities of the United States and England combined represent more than half of total world activity; and these countries are, in normal times, the main sources of capital. World booms and depressions are more likely to spring from changes originating in them and carried outward than by the reverse process. As has been indicated repeatedly by the course of events, international capital movements are likely to be mainly a phase of expansion or contraction in the major countries. We are likely to export capital at the same time that we expand investment at home. If we also attract capital, as in a major rise of the stock market, it is most apt to come from England or some other major country.

From this point of view, the problem of monetary stability appears to be one which calls in large measure for an over-all control, rather than for a compensatory mechanism operating as between countries, and to require as its main foundation effective internal monetary control in the leading countries. It ought not to be impossible in a matter of such mutual interest and serious importance to achieve, after the experiences which the nations have gone through in pursuing their own narrower ends, some community of action in monetary and general economic policy; but I must add that I am not altogether sanguine. Even without such formal co-operation, I believe that the best prospect for general stability is to be found in internal stability in the leading countries if it is intelligently, which means not too narrowly, conceived.

But it is not to be expected that economic change would or should exactly keep pace in all countries; that is far from true even in the different parts of our own country. There will always be diversity of change and of pace and character of development. There will be business cycle lags and leads as between countries. There will be crises here and there, registering their effects not only in the countries of origin but in others, and perhaps especially in the center countries. What an effective system of compromise must do is to provide slacks and elements of variability which will lessen shocks, permit monetary change to be slowed down to the pace which the economic structure can tolerate, and leave freedom of action in directing the impact and extent of change. For this purpose, it seems preferable to have some compromise, or combination of compromise systems, which, while excluding no form of variation which might be serviceable in a constantly changing world, would resort to currency variation only sparingly and when other means had failed.

(B) Extract from “Currency Stabilization: The Keynes and White Plans” * (July 1943)

The most important question, however, is whether in the longer run, when the transition to peace has been achieved, the general type of monetary organization outlined in the Keynes and White plans promises to give the best assurance of achieving and maintaining international currency stability, with all that implies for a stable and orderly economic world. This, too, I do not find an easy question, and my present attitude is one of wanting to hear more and think more about it as the debate develops. One of the dangers involved in the present technique of concentrating upon the comparison of the two plans, and taking the visiting experts of the allied and associated governments through them point by point, is that no other plan is likely to get an adequate hearing—unless it be later on, at the legislative stage, which may not be the best method of arriving at well and calmly reasoned conclusions.

The difficulty for me is that I have long believed that there is another kind of approach to the problem, and one that deserves equally well the name of international collaboration even though it is constructed on less elaborate lines. This is what might be called the key countries, or central countries, approach to the problem.8 It is closer in conception than either the Keynes or White plan to the way the gold standard actually worked, around England as the central country, in the nineteenth century; whereas I have the feeling that those plans have a closer family relationship with what might be called the textbook type of gold standard, which implied that monetary stability was maintained by the compensatory action of a large number of countries of equal economic weight. What I call the key countries approach to monetary stabilization could be tried with or without an international governing board, though I think this is not the main point of difference between the two ways of going at the problem.

The main difference is in the conception of how trade and finance are organized in the world, and of the importance of stabilizing the truly international currencies whose behavior dominates and determines what happens to all the others. Though the organization of trade and finance has undergone much change since the nineteenth century, it still seems true that stabilization of the leading currencies with reference to each other, combined with coöperation among the countries concerned for the promotion of their own internal stability, would be the best foundation for monetary and economic stability throughout the world.

The importance of coöperation upon internal as well as external monetary and economic policies in the leading countries is in line with the current of thought among economists in recent years. One of the most interesting points in Keynes’ White Paper is the lightness of touch with which he deals with internal policies. “There should be the least possible interference with internal national policies, and the plan should not wander from the international terrain. Since such policies may have important repercussions on international relations they cannot be left out of account. Nevertheless, in the realm of internal policy, the authority of the governing board of the proposed institution should be limited to recommendations, or, at most, to imposing conditions for more extended enjoyment of the facilities which the institution offers.” As I read over his provisions as to what debtor countries may be required to do to adjust their position as their net debit balances mount from a quarter to a half to three-fourths of their quotas, I am not overly convinced that the board’s powers of control have very strong or sharp teeth. On exceeding a quarter of its quota on the average for two years, the debtor country may depreciate its currency up to 5 percent. On reaching a half of its quota, it may be required to deposit collateral. As a condition of exceeding a half of its quota, it may be required to do all or any of the following at the governing board’s discretion: reduce the value of its currency; control outward capital movements; and/or surrender a suitable proportion of any separate gold or other liquid reserve in reduction of its debit balance. It is at this point that the governing board may “recommend … any internal measures … which may appear to be appropriate.” On exceeding three-fourths of its quota, the debtor country “may, in addition, be asked by the governing board to take measures to improve its position, and, in the event of its failing to reduce its debit balance accordingly within two years” may be declared in default and no longer entitled to draw against its account.

All of these measures seem desirable. In particular, I have long believed that the younger countries, whose economic conditions primarily reflect the conditions existing in the great world markets, for which they are only secondarily responsible, should be permitted to vary their currencies. It might help them somewhat, without too seriously affecting the larger countries. Such countries do not often have major difficulties arising out of the outward movement of capital; for them the exchange problem is usually presented by the stoppage of the inward movement. When this happens, they are not unacquainted with being declared in default. The same circumstances which stop capital inflow restrict the markets for their products and produce a severe shrinkage in the value of their merchandise exports, so that these countries are frequently unable to maintain interest payments or even to pay for their current imports. The classical economists would have insisted upon internal reduction of their costs; and some countries, like Australia in the great depression, have proved that internal cost reductions can be a feasible and a potent method of adjustment of the international position.9 But, broadly speaking, the whole experience of the inter-war period proved nothing more clearly than the fact that the economic condition and the balance of payments position of these countries are primarily a reflection of the conditions in the larger countries, and that if those conditions are bad enough, there can be no real escape, even though the countries are driven—as most of them were—to exchange control as a desperate last resort.

From this experience of the inter-war period, I come back always to the conclusion that the problem of international monetary stability is primarily that of maintaining a state of proper economic health in the leading countries; and that this is the only workable answer to the whole conflict between internal and external monetary stability, about which discussions of the gold standard for years revolved.10 This means collaboration to maintain both a high level of real income within the leading countries and a high degree of exchange stability between them. If this could be done, the problem of maintaining exchange stability for the other countries, and a reasonable state of economic well-being within them, would probably not present major difficulties.

But such a program implies a degree of cooperation among the leading countries which goes far beyond what is outlined for the governing bodies in either the Keynes or the White plan. I doubt whether the requirements could be spelled out at present, or even whether it would be wise to try to do so. But I heartily agree with Herbert Feis when he says in his article in the April number of Foreign Affairs that the best augury for success lies in the intimate collaboration upon numerous problems which has already been developed between this country and the British Empire in our conduct of the war.

Between the two approaches to the problem of monetary stabilization which I have discussed, the Keynes or the White proposal on the one hand and the closer collaboration among leading countries on the other, there may be no inherent or fundamental disagreement. A French plan of the kind I have suggested was prepared prior to the release of the British and American plans and has since been published in the New York Times.11 One of the reasons advanced in favor of it by the authors was that it could be put into effect promptly, whereas in their judgment “If the international monetary system is so ambitious that it cannot become of general use until political and economic conditions are peacefully settled in the whole world, it may have to wait a long while.” It might be more feasible to start with a scheme embracing fewer countries, which is less ambitious only in the sense that it is less extensive and more ambitious in the degree of coöperation contemplated, and tie in other countries as conditions warrant. This was the method followed in the Tripartite Agreement of 1936. I am not suggesting that agreement as the model, however, unless it can be greatly strengthened in its provisions for external collaboration and supplemented by provisions for coöperation on internal policies, to which it made no reference. There might be many advantages in such a piecemeal procedure. We could start, for example, with plans for stabilizing the dollar-sterling rate and for measures of coöperation on internal policy, while postponing until later the many difficult questions about the relation of sterling and the dollar to the European currencies which cannot conceivably be settled, I think, except after a period of European reconstruction.

Since I have dealt here exclusively with the proposals for currency stabilization, I should say in conclusion that monetary mechanics is only the lesser part of the problem, as the authors of the plans discussed fully recognize. Keynes begins his White Paper by suggesting four main lines of approach to the problem of how to achieve a stable and prosperous world, of which the mechanism of currency and exchange is only one. The others are international commercial policy; orderly conduct of production, distribution and price of primary products; and investment aid, both medium and long-term, for countries whose economic development needs assistance from the outside. Work is going forward on these other lines of approach, and upon the success of this work will depend fundamentally the success of our efforts, by whatever plan, to achieve international monetary stability. In all phases of it the United States has a vital interest and carries a unique responsibility. This will be the leading and probably the only important creditor country after the war. If we are to have an orderly and stable world, our responsibilities must not be shirked. But our rôle being what it is, and must be, we owe it to ourselves and to the rest of the world to think through the problems with all the intelligence and care and breadth of outlook of which we are capable.

*Reproduced by permission of Professor Williams and The American Economic Review.
10It may, for example, be desired to lower currency A relative to B but to raise it relative to C.
*Reproduced by permission of Professor Williams and Foreign Affairs.
8See again my paper, “The Adequacy of Existing Currency Mechanisms under Varying Circumstances,” American Economic Review, March 1937, Supl., p. 151–168.
9Australia also depreciated her currency and adopted expansive monetary and fiscal policies.
10See my paper, ‘The World’s Monetary Dilemma—Internal Versus External Monetary Stability,” Proceedings of the Academy of Political Science, April 1934, p. 62–68.
11The New York Times, May 9, 1943, p. 5. The plan was prepared by André Istel, former financial adviser to the Reynaud Ministry and one of the negotiators of the Franco-British Financial Agreement of 1939, and Hervé Alphand, former financial attaché in Washington, former head of Trade Agreements in the French Ministry of Commerce, and French representative at the International Food Conference at Hot Springs.

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