Volume #16 - 917.|
Alternate Chairman, Foreign Exchange Control Board,|
to Assistant Administrator of Program, Economic Cooperation Administration of United States
January 3rd, 1950|
You may recall that when I visited you in Washington a couple of weeks ago you were good enough to hand me a copy of an ECA working paper dated December 9th on Intra European Currency Transferability and Liberalization of Trade. t You did not specifically invite comments, but it has occurred to me that it might be a welcome change for someone connected with ECA to be on the receiving end for a few moments even if only for disinterested comments. The views I express in this letter are, of course, personal, though I should say that I have discussed the paper with a few people here who are concerned with these matters and I think that they would agree with most of what I propose to say.
In the first place, I think that, viewed as a set of arrangements to facilitate trade within the group of countries covered, i.e. sterling area and Western European group of countries, the present proposals represent a considerable improvement over the arrangements embodied in the intra European Payments Agreement. The improvement results mainly from the fact that in the set up you are now proposing a sniff of the market is introduced through the untieing of drawing rights and through the provisions regarding quantitative trade restrictions. Of course, so far as the latter is concerned the proof of the pudding will be in the eating; and if, as I suspect, the basic reason for many of these quantitative restrictions is simply protection, rather than balance of payments difficulties, you are going to encounter great resistance to doing away with them even though ECA may be prepared to put quite a bit into the pot.
Another feature about the new proposals which is good is that the arrangements for creditors getting progressively smaller, and debtors paying progressively larger, proportions in the form of gold for their infra area surpluses and deficits beyond a certain point do appear to provide appropriate national incentives, i.e. for surplus countries to sell to the Western Hemisphere and for deficit countries not, to regard their imports derived from within the area as "free". What bothers me about this is how does one translate these national incentives into individual incentives for the exporters and importers in the various countries. If this is to be done through the price mechanism it would seem to involve pretty continuously fluctuating exchange rates with the cross parities disrespected. The opportunities this affords for all sorts of tricks and games make me shudder. Perhaps the price system isn't expected to do this job does this mean then that it is done by export controls? To put the question concretely, when Belgian exports to the area have passed beyond the agreed credit margin plus the agreed structural surplus and Belgium is getting less than 100 per cent gold settlement for her exports to the area, there is a national incentive for Belgium to shift exports to the Western Hemisphere but how is she expected to create individual incentives for her exporters to look for markets in the U.S.A. and Canada?
I would like to refer now to some of the broader issues connected with these Western Europe cum sterling area payments arrangements. It seems to me that there are two ways of looking at these arrangements. One way is to regard them as a piece of machinery for facilitating intra area trade. Another is to regard them as a part of the process of attaining the ultimate economic objectives of the European Recovery Program which I conceive to be that the dollar earnings of Western Europe shall be raised to a level which, when supplemented by a reasonable continued outflow of capital from the United States, permits Europe to balance her dollar accounts at a high level of transactions without the necessity of continued discrimination against dollar imports. Now this second objective is obviously much more important than the first in fact there is no immediately apparent reason why intra European trade should be especially encouraged, unless of course one despairs of ever reaching the second objective. At all events this does point to the necessity of making sure that the arrangements to facilitate infra area trade are not of a character which will tend to reduce the dollar earnings of the countries concerned.
You are yourself, of course, well aware of this and the new elements which have been introduced into the plan reflect your concern in particular, the multilateralization of drawing rights and the arrangements for the abolition of quantitative restrictions. But I think it important to recognize that, even with these safeguards, the plan does involve certain risks. One is it will add to the inflationary pressures in the countries concerned. I say add to the pressures, because it seems to me that the desire for defence and social security programs which are really beyond the economic capacity of these countries plus the fact that the area includes undeveloped countries where inflation tends to be endemic probably makes this whole Western Europe sterling area constellation an inflationary area anyway, as compared with the United States and Canada. The provision now of guaranteed credit margins plus guaranteed cash for financing intra area trade can, unless precautions are taken, help this part of the world to develop into a separate trading area, with costs and prices higher than in the dollar countries, and protected against the dollar countries by discriminatory import restrictions. One need only think of the way in which the operations of the sterling area (an area of multilateralism and free capital movements in many respects similar to that at which your proposal aims) has weakened the position of the United Kingdom in recent years and reduced its capacity to earn dollars to remind oneself that transferability of currency and free capital movements within a closed area provide no guarantees of desirable economic results. One would certainly not want to see this present scheme encourage the formation of separate economic blocs even though the "soft currency" bloc is larger and more co ordinated than it has been in the past.
Such a development would be defensible only if one despaired of the "soft currency" bloc ever earning enough dollars to pay (along with such capital outflows from the Western Hemisphere as take place after the ERP period) for a tolerable level of dollar imports without continuing discrimination. And I suppose that if one did despair, it might be either because one felt that the deficit countries were incapable of the internal adjustments required or because one felt that the United States would not pursue a tariff policy appropriate to her international position. I know that I am beating at an open door in suggesting to you that these are the really constructive approaches to the problem. But I say it anyway because these European currency schemes always give me the nervous feeling that they are preparations for failure of your long term objectives rather than preparations for success.
The inflationary dangers in the proposed plan are, of course, largely a function of the amount of extra purchasing power put into the financing of intra area trade. From this point of view, I would therefore like to see both the required credit margins and the amounts provided to cover "structural surpluses" kept down to a minimum, though I realize that bait is needed if trade is to be liberalized. For the rest, I think that some safeguard against the re emergence of the problem of the highprice, low price areas (which the recent devaluations has at least partly met) could be obtained by insisting on a pretty rapid demobilization of intra area trade restrictions and a beginning at relaxation of the severe discriminations against dollar imports. The latter postulates dollar earnings which increase more rapidly than ERP assistance tapers off. With help from the American end by way of encouraging imports, through effective action on tariffs and customs administration, and with a willingness on the part of the deficit countries really to direct their policies, internal and external, at earning dollars, I should not have thought the thing impossible. At all events, if it really is impossible then the outlook for the eventual achievement of the objectives of the foreign economic policy of the U.S. (and Canada) is very bleak indeed.
I feel that I should apologize to you for the length of this letter. The most practical amend I can make is to tell you that, realizing how busy you are, I shall not expect a reply to it.
With warm regards, and with best wishes to you and your associates for the New Year, I am