Money Makes the Mare To Go

REVEREND SIR (S), DISTINGUISHED GUESTS, LADIES AND GENTLEMEN.

The Empire Club is greatly honoured today in having as its guest and speaker, Dr. F. Cyril James, Principal and Vice-Chancellor of McGill University.

Dr. James was born in England and Educated in London, graduating from the London School of Economics. University of London with B.Com. degree and the University of Pennsylvania (A.M. 1924, Ph.D. 1926)-also receiving LL.D. degree from Queen's University, New York University, University of Saskatchewan, Syracuse University and our own University of Toronto: the D.C.L. from Bishop's University.

Dr. James has had a distinguished career and is widely known for his educational work in Canada and elsewhere. In 1939 our guest was appointed director of the School of Commerce, McGill University and a few months later was appointed principal and vice-chancellor of McGill University.

Dr. James has served on many committees in connection with financial research as well as Educational pursuits and was chairman of the Canadian Government's Advisory Committee on Reconstruction--member of the Board of Governors of the Royal Victoria Hospital--of the Welfare Federation of Montreal and is vice-president of the National Conference of Canadian Universities. Our guest is also a fellow of the Royal Economic Society of London--the Institute of International Affairs and many other societies and institutions.

As an author, Dr. James is an authority on social science, finance and economic history--a few of his well known publications being--"The Economics of Money, Credit and Banking", 1930--with a third edition in 1940--"The Meaning of Money" 1935, "The Economic Doctrines of John Maynard Keynes" and "Economic Problems in a Changing World". In this connection I would particularly refer you to the Empire Club published addresses of 1940-41, when Dr. James, on February 6th, 1941, addressed our Club, his subject being "Inflation and War Finance" and that address is, to a surprisingly accurate extent, a preface to the one we now anticipate.

It gives me a great deal of pleasure to introduce to the Empire Club Dr. F. Cyril James, B.Com., M.A., Ph.D., L.L.D., D.C.L., who has chosen as his subject

"Money Makes the Mare To Go"

Dr. James

Seven years ago this month, when I had the privilege of addressing the Empire Club, I discussed with you the dangers of monetary inflation in time of war. The experience of history suggested that any resort to facile expansion of the monetary supply, for the purpose of avoiding courageous policy of taxation, would create problems almost as serious as those of war itself.

The wartime policies that were adopted by the government of this Dominion have, as I hope to show you in a few moments, avoided the temptations of monetary inflation more successfully than those of many other governments, but the most cursory survey of monetary conditions throughout the world indicates already the extent of our failure to attain in the great majority of countries the high hopes of Bretton Woods that were embodied in the resultant International Monetary Fund.

Let us pause a little while, before looking at the details of the present problem, to refresh our minds regarding the ideals that underlay the discussions at Bretton Woods, in which the Canadian representatives played so distinguished a part that the final pattern of the International Monetary Fund (midway between the American contentions of Dr. White and the British proposals of Lord Keynes) might well be said to be a Canadian invention. The leading nations of the world unanimously desired the reestablishment of an international monetary system, a system in which foreign exchange rates would be stable and the currency of any one country could be freely convertible into that of any other.

If we remember that the agreements leading to the creation of the International Monetary Fund (and its sister institution, the World Bank) were among the first of our efforts toward the post-war reconstruction of the world economy-and recall the many other problems that were urgently demanding attention-we can realize the high importance that governments and peoples, in all countries attached to the restoration of a world monetary system.

I think it was H. G. Wells who first pointed out that the invention of money offered to mankind freedom of economic opportunity, a chance for individual initiative and an entirely new concept of freedom in all our personal relations. The statement is true. It was the impersonal efficiency of the gold standard during the nineteenth century that made possible the rapid development of all parts of the world through the operation of private enterprise. The pounds sterling that were idling in the hank account of a wealthy English spinster could be transmuted into German steel rails and American locomotives to construct a railway in Brazil, and the freights of coffee which that railway brought down to the seaboard were again transmuted into the money with which the English investor paid her bills at the hotel on the Riviera where she chose to live. The English investor did not need to know the name of the German firm that supplied the steel or the American locomotive builder, still less was she expected to know about the operation of Brazilian railroads. She did not even need to drink coffee. All these diverse activities in many parts of the world were somehow coordinated through the operation of the gold market and the foreign exchange market, which had their centre in the alleys around the Bank of England and stretched delicate nerve-channels out to all the money markets of the world.

Not until the first World War had finished did we realize how fundamentally the smooth operations of world trade depended on this delicate monetary mechanism. When the gold standard broke down, goods ceased to move and the economic relations of the world were unbalanced. Prices rose in some countries and fell catastrophically in others. Men starved in the East while foodstuffs rotted on the farms of western countries. Goods were desperately scarce in many parts of the world, while the men, in other countries, who could have made them, were suffering long periods of unemployment.

Strenuous efforts were made to restore the old gold standard, but these efforts did not succeed, and during the great depression of the 'thirties world trade spiralled downward to the meagre trickle that could be organized on the basis of bilateral treaties under which, in the primitive fashion of our remote ancestors, a load of German steel was exchanged for a load of Brazilian coffee after lengthy negotiations. The great freedom which money had given to mankind had gone, and autarchic regulation by government had taken its place. We gave up, in our despair, the ideal of a freely functioning world economy, and each nation ruthlessly strove to improve its own position by stepping on the heads of its neighbours. Even if the phrase cold war had not been invented, the reality existed. Your own memories can recall the stages by which that cold war moved steadily into the most savage conflict that history records.

That, in a nutshell, is the reason that-three short years ago--the leading nations of the world unanimously agreed that the restoration of an international monetary system was absolutely essential to the restoration of a world economy and the establishment of the Four Freedoms which had been envisioned as our goal in the dark days when the Atlantic Conference was secretly held on the quiet waters off the coast of Newfoundland. Because we knew the profound significance of a world monetary system, we left nothing to chance, and every effort was made to avoid the mistakes of the 'twenties. This time we were not willing to rely upon unilateral action, with its opportunity for competition and mistakes of omission. The whole matter was fully thrashed out at a series of official, and unofficial, conferences, and the final decisions were set forth in an elaborate international treaty. This time we should start the long and difficult task of reconstructing the world within the framework of an efficient international monetary system, simplifying our problem and clearly defining our goal by that decision.

What has been the result? The major events are clear in all our memories, and the mere recital of them indicates the extent to which we have fallen below our ideals. Within less than a year of the full inception of the International Monetary Fund, Great Britain found it necessary to suspend the convertibility of the pound sterling. Anybody, in other parts of the world, who sold goods to England could not freely exchange for dollar currencies the pounds sterling that he received in payment; and, since Britain is still one of the world's greatest importers, a serious breakdown of the international monetary system was the immediate result.

We, in Canada, were immediately affected. In spite of the fact that our exports were higher in value than at any previous period of Canadian history, and substantially exceeded our imports, we could no longer exchange for U.S. dollars the pounds sterling that we received for the vast quantities of goods that we shipped to Britain. Our sterling balances increased, but in spite of the cooperative efforts of Great Britain to help us we found that we had not enough dollars to finance the purchase of those goods and services that Canadians wished to purchase from the United States. Restrictions were imposed on our imports from the United States, and upon the extent to which Canadians could enjoy the winter sunshine of Florida and California.

Shortly afterwards, there were other developments of an equally serious kind. Russia, which seems to suffer from many of the problems of capitalist countries in spite of its communist philosophy, announced on December 14th that it was devaluing its rouble. Although the foreign exchange rate did not change, having long been maintained at an artificial and arbitrary figure by reason of the strict regimentation that the government of the U.S.S.R. maintains in every segment of the Russian economy, the individuals who had practised the ancient virtue of thrift were deprived by this edict of nine-tenths of their savings. The Russians were told, moreover, that the rationing of foods and industrial consumer goods would be abandoned so that the remainder of the individual's savings would command smaller quantities of goods in that peculiarly capitalist organization-a free competitive market-which Russia has now adopted for the first time in Soviet history. If the announcements of the Moscow radio mean what they say, the present monetary difficulties have forced the Russian government to go much further than the N.E.P. which Lenin reluctantly adopted for a brief period in the early phase of Soviet history. If rationing, which was so clear to the hearts of communists, has been abandoned and the Stakhonovite system of rewards maintained, the Russian worker is now in the position where the quantity of food that he can eat depends directly upon the amount of work he does, with no family allowances or unemployment insurance benefits to temper the wind to the shorn lamb. Surely no more startling demonstration was ever offered of that ancient adage that "money makes the snare to go".

Just a month later, during the last week of January in the present year, France tackled the same problem of domestic inflation by quite different methods. The domestic value of the franc was not touched, so that the Frenchman still enjoyed the same paper wealth; but the official foreign exchange rate in terms of U.S. dollars was raised from 119 francs to 214. The Canadian and the American could get nearly twice as lame a basket of French goods for his dollar--whether he desired brandy, or perfume, dresses for his wife or a holiday on the Riviera.

These developments are serious enough, in all conscience, but the Canadian plans, and the French. went even further to strike at the root of the Bretton Woods Agreements. It is fundamental to any international moneta.rv svstem that there should he some standard to which everything else is related: without that we should have no more than an elaborate Heath Robinson complexity transposed into the realm of nightmare because each of its parts was independently elastic.

In the Bretton Woods Agreement, the point of departure was the U.S. dollar, which was defined as one thirty-fifth part of an ounce of gold, and it was assumed that the foreign exchange values of all other currencies would be fixed at that point relative to $35 which indicated the domestic purchasing power in the country concerned of one ounce of gold. When the Government of Canada suggested that without changing the official exchange rate vis-a-vis the U.S. dollar, it would pay $42 an ounce for newly-mined Canadian gold, it struck at the fundamental principles on which the Bretton Woods Agreement was constructed; and although the pattern of Canadian policy has been chanced substantially as a result of discussions with the International Monetary Fund, there is still a measure of conflicting principle in the present proposal (announced by Mr. Abbott on December 11th) to pay a bonus to those Canadian gold mines that increase their production by t least two-thirds of the amount produced in the year ending on June 30th, 1947.

Even more serious is the policy adopted by the French Government, which in addition to devaluing the franc in terms of official quotations, has established a free gold market and, within certain limitations, a free foreign exchange market on which dollars and sterling can be sold at a price that differs from the official quotations. This decision, so far as we know, was taken unilaterally without that prior consultation with the International Monetary Fund by the Bretton Woods Agreements. It is a policy that is dangerous not only to those who are responsible for monetary management in France but to those who bear similar responsibilities in regard to the pound, and other currencies, since it implies a serious break in the general pattern of conscious monetary management on a worldwide scale.

These technical details of exchange rates and gold prices may not seem important in a world that is faced with many problems that fill the headlines. They are not as obviously pregnant with human drama as the tragic death of Gandhi, the riots in Palestine or the fighting on the northern frontiers of Greece. But, if we really hope to create a world economy in which there is opportunity for human freedom and a decent standard of living, they are just as important. To sabotage the international monetary system for the temporary purpose of advantaging a national economy is perilously close to that blind and futile selfishness which led men steadily towards catastrophe during the nineteen-thirties.

In spite of all the difficulties that we face in the economic field, we must keep the ideal of a sound world monetary system continually before our eyes and not fall into the temptation of sabotaging the programme when it seems to be our immediate advantage to do so.

But we must do more than that. The breakdown of the Bretton Woods Agreement during the past twelve months has been due not to technical imperfections in the International Monetary Fund but to the fact that we have neither recognized nor corrected the weaknesses which are amply apparent in the domestic economies of the participating countries. We have not tackled the problem of domestic inflation, nor solved the problems that arise from the disequilibrium in the balance of payments.

Let us look first at the problem of inflation, since it is a fundamental assumption of any international monetary system that rates of exchange correspond in approximate fashion to the purchasing power of the two currencies in their respective countries. If a pound exchanges for four dollars, it is assumed that four dollars in Canada will purchase as much as one pound in England, and in the old days of the gold standard the fluctuations of foreign exchange rates beyond the gold points automatically maintained such a relationship. It follows, therefore, that under an international monetary standard the movements of price level in all the participating countries must keep step, or else the exchange rates must be adjusted to-the altered situation.

This has not been the case. I must exclude Russia from consideration because we have no useful statistics, but we can observe the disparities that have arisen in the other countries with which we are concerned. In the United States and Great Britain, wholesale prices have doubled since 1938-the last pre-war year. In Canada the increase has been less (about 80°0), but in France the present wholesale price level is twelve tines what it was in 1938.

This increase in wholesale price is not due in any large measure to speculative profiteering or black market operations. It is due primarily to the increase in currency and bank deposits resulting from deficit-financing on the part of the several governments during, and since, the war. But if we look at the figures of monetary supply in the various countries we realize that there is even more dynamite in the present situation than seems obvious at first sight. In France, the monetary supply (notes and deposits combined) has increased from 131 billion francs, in 1938, to 1,164 billion at the end of 1947-an increase that is much less than the rise in prices, so that velocity of circulation has obviously increased and a "flight from the franc" is apparent.

In each of the other countries the situation is reversed, and money supply has increased more than prices have risen.

Even when we make allowance for the fact that there has been some increase in the supply of goods, especially in Canada and the United States, it is apparent that the velocity of circulation has declined, so that tremendous forces for potential inflation still exist.

To take one further series of statistics, it is apparent that price dispersion-the diversity in the extent to which individual prices have changed-is substantial in these countries. The following figures which show the situation at the end of 1947, as a percentage of the average figure for 1938, tell their own story.

*-figures not available

In Canada, we have maintained a reasonable equilibrium between the price of farm products and that of manufactured goods, but the contrary patterns of the American and British economies are at once obvious. Nor can we assume that the recession of prices in the commodity markets of the U.S., which is now attracting so much attention will correct the situation, since in a period of deflation, just as much as during inflation, there is no reason to expect that individual prices will change proportionately to one another.

This problem could be discussed at great length if there were time, but enough evidence has been offered to suggest that, in Canada and throughout the world, we must study afresh the validity of the foreign exchange rates that are now in effect. We must do so cooperatively, through the machinery which the International Monetary Fund offers for that purpose; but we must do it honestly and without sentiment, because no international monetary system can work if it is hamstrung by artificial exchange rates.

Mr. Henry Hazlitt, in his thought-provoking essay entitled Will Dollars Save the World, has suggested that such an adjustment of foreign, exchange rates would go far to solve the disequilibrium in the balance of international payments, which I mentioned as the second of the fundamental problems that confront us.

He is undoubtedly right, in part. If the Canadian dollar, as a result of the recent devaluation of the franc, will purchase twice as much French brandy or millinery. we can expect that France will be able to increase her exports to Canada and thus finance a larger import of Canadian food to nourish her children. In a more general sense, if all the foreign exchange rates that are now maintained at an artificially high level were reduced to something like "purchasing power parity", the countries of Europe would all be able to expand their exports.

At first sight, Mr. Hazlett's proposal looks like a comfortable suggestion by which we, in North America, can silence the urgent promptings of conscience. Let the Europeans devalue their currencies far enough and we shall be glad to give then dollars for all that they have to sell. We can thus avoid the need for offering credits!

That answer will satisfy the priest and the Levite, but not the good Samaritan! Let us admit that some devaluations are necessary. Let us work through the International Monetary Fund to ensure that they are wisely and efficiently carried outbut let us remember that competitive devaluation, to which our own inaction may force some of the weaker nations, is but the suicidal effort by which a despairing nation that will not see its children starve, places upon the counter of the international pawnshop, everything that it has inherited or can produce. We must not think in terms of the happy repudiations of some of the South American nations during the nineteenth century, which hurt nobody but their creditors: competitive devaluation in Europe today would be- like the nightmare experience of France or Austria in the early 'twenties-an experience that, far from aiding the course of reconstruction, has left an indelible mark on the generation that experienced it.

If we are to attain equilibrium in the international balance of payments-which is essential to the functioning of the International Monetary Fund-and to attain it in a manner that constructively lays the foundation for future economic stability, we must make available at once out of our great riches such loans and gifts as will enable the people of Europe--not even excluding those who were our enemies-to get themselves on their feet and take up their full responsibilities for the functioning of the world economy.

It is not a time for penny-pinching discussions of false economy. The $6.8 billions of the Marshall Plan commitments for this year represented the irreducible minimum in the minds of the men, well qaulified to know, who studied the situation on the spot; and it does not make sense to suggest the easy arithmetical reduction to $4.0 billions while we sit in the pleasant comfort of our heated rooms after a good meal. I say this with no sense of criticizing the friendly government of the United States. Even if the full Marshall Plan is approved by Congress, goods to the value of $4.8 billions must be provided from sources outside the United States and Canada is expected to provide one-third of that total before June 30, 1949. Even more urgently, Canada is expected to provide $211 millions of goods before June 30th, 1948.

At the moment, there is jubilation in Canada at the suggestion that the United States will purchase with U.S. dollars some $2.6 billions of the goods that are needed from beyond its borders, so that Canada should benefit to the extent of about $900 millions. This sum will greatly strengthen our foreign exchange position in terms of dollars, and help to solve the problem that has already been mentioned, but the generous action of Canada during the past three years is enough to prove that our interest in the Marshall Plan cannot stop at this point. We must certainly provide great quantities of goods: I think that we also have a further responsibility to provide, on our own account, supplemental credits that will augment the Marshall Plan and increase the immediate aid to Europe. This responsibility will, moreover, increase if the Congress of the United States should reduce the overall figures envisaged by the Marshall Plan itself; so that, in spite of the fact that I dislike paying taxes just as strongly as the next man, I would suggest that the Government of Canada should think carefully about the desirability of maintaining present personal income taxes on all brackets--low and high--as a part of our effort to restore a world economy, Such taxes necessarily restrict consumption; but we must restrict consumption in some way if we are to send adequate quantities of goods to Europe, and if we do not restrict it, the Marshall Plan (together with our own Canadian credits) may intensify the inflation in this country. The surplus revenues resulting from such taxation will, moreover, provide the funds out of which enlarged credits such as I have suggested can be made available.

It is now, in this year of grace 1948, that we must decide how much we are willing to pay for the privilege of giving our children a better chance to live their lives in peace; and, if money makes the mare to go, we must decide today in which direction we want her to pull our destiny.

Appendix.

Brief Notes Regarding the Marshall Plan.

During the period from April 1, 1948, to June 30, 1949, it is estimated that the total imports of the sixteen European nations that are participating in the Marshall Plan will amount to $11.8 billions. (This includes all of Germany except the Russian Zone.) Of this, the United States expects to supply $7.0 billions, but other nations in the western hemisphere will be called upon to supply $4.8 billions.

Out of the $11.0 billions of European imports, it is expected that $4.2 billions will be purchased by means of exports from the European countries: the remaining $6.8 billions will have to be financed by credits from the United States.

It is further suggested that, out of these credits, aggregating $6.8 billions, the United States will spend $2.6 billions on the purchase of goods (for Europe) from the other western nations-leaving them to finance the difference between that figure and the total of $4.8 billions mentioned above by imports from Europe, or by credits extended on their own account.

In the case of Canada, it is expected that the Dominion will have to supply about one-third of the goods needed from outside the United States, i.e., about $1.6 billions. It should therefore receive in United States dollars about one-third of the amount that the U.S. will expend beyond its own borders, or $900 millions.

Table I.

Estimates of the quantities of goods to be provided by countries outside the United States that would be paid for in U.S. dollars under the Marshall Plan-April 1, 1948, to June 30, 1949.

Table II.

Estimates of the total quantities of some of the more important commodities that Canada would have to provide under the terms of the Marshall Plan.

July 1, 1948