PROTECTION MONEY
The only justification to be found for the relief and near-euphoria which greeted the Washington agreement of the Group of Ten is that it has produced a temporary alleviation of that uncertainty and depression which has been inflicted on the world's economy since last August. By devaluing the dollar, revaluing the yen and other leading currencies, raising the price of gold, lifting the American import surcharge and the discriminatory element in President Nixon's job development credit system, and — most important of all — widening the margins of fluctuation in exchange rates, the Group has postponed the danger of a trade war and considerably eased economic and trading relations between the richest countries. But, of its nature, the alleviation produced can be only temporary. No steps fundamentally to alter the Bretton Woods system have been taken. It is this system which, more than anything else, has been at fault for the recurring crises and illnesses in international economic relations in recent years. Everybody pays lip service to the idea that fundamental reforms are necessary but, even at times of crisis which demonstrate the deep-seated inadequacies and instabilities of the system, no one appears to possess the will to reform. If the measures of currency adjustment now being taken are adequate to deal with the present situation then we have not, in the past few months, had a crisis at all, for these measures are paltry. If, however, we have had a crisis, then the measures are inadequate and the crisis will recur.
We are being promised further investigations into necessary change. There is to be a planned agenda agreed for the discussion of fundamental trade issues between the United States and the EEC in 1972; the Group are agreed on the need for reform of the monetary system and for the removal of non-tariff barriers to trade, and these are to be discussed, along with the replacement of gold and reserve currencies, by man-made assets; and the dollar devaluation itself is still dependent on further agreement on trade policies. We have heard all this before. It remains the case that we do not know what the trade issues for immediate discussion are, that all the other undertakings to investigate entered into by the Group of Ten have been listed before as requiring urgent attention, without ever receiving it; and that the Group now look no nearer than they have ever done to finding an effective way of integrating negotiations on exchange rates and on currency valuations with those on trade policies.
This last is crucial. The Bretton Woods system was one designed to create and sustain a status quo in currency relations between the rich powers. There was neither inbuilt flexibility in the system, nor provision for adapting it to future changes in economic configuration, industrial change, and political interest. It was, and has increasingly become, a banker's charter which presumes that the entire spectrum of economic relations and activities can be expressed in terms of artificially fixed exchange rates. The system, as it has developed, has the maximum resistance to market forces, the maximum resistance to national interests and the maximum resistance to the horsesense of traders. It has the further disadvantage of viewing world economic relations entirely as a matter of relations between the members of the Group of Ten: other countries, as the Washington communiqué says, "will need urgently to reach decisions, in consultation with the International Monetary Fund, with respect to their own exchange rates." This is politically and economically dangerous: other countries become more conscious of their exclusion from the club, of the influence of that club on their affairs, and of their ambitions for themselves. It is also economic nonsense for members of the Group itself (except the US, which is less dependent on trade outside the Group than the other members), who need to expand and develop trade with the rest of the world. It is, in short, no longer sensible to think of world trade and world economic relations in terms of a game of banker's bridge played by the IMF and the Group.
In the world of Bretton Woods, the whole business and purpose of trade is something tacked on to a system of currency valuation which is entirely artificial. The single encouraging provision in the new package is the extent to which currencies are allowed to float. But it is doubtful if the margins of floating are sufficiently wide, given the percentages of revaluation and devaluation involved. It is possible, for instance, that the pound will be found to have been overvalued by the end of next year. The halt in our declining share of world trade which occurred in the course of this year will then be ended, and the pressure will be for another devaluation in 1973, with all its concomitant disruptions. One advantage of a floating currency is that it allows these changes in valuation to take place in the normal course of trade, without the domestic and social upheavals invariably occasioned by sterling crises, balance of payments crises, and the inflations and deflations we have so often experienced in the past.
To float can be, however, only part of• the answer. What is wanted is a completely new conceptual system for defining the economic relations between states. We need, among other things, a new notion of reserve assets. It will be no comfort to move from holding reserves in dollars and gold to holding them in the form of pretty bits of paper which are called International Monetary Units -or Credit Cards — as the IMF would like: we need to investigate seriously the possibility of holding reserves in the form of raw materials and other real assets. At the. same time we need to take a fresh look at commodity trading policies so that economic relations between "rich " and " poor " countries can be expressed in the real terms of economic interdependence. There are other tasks. The need is to get away from a banker's concept of economics, and on to a trader's concept, modified only by the requirements of political objectives. The dish of palliatives served this weekend in Washington no longer provides an acceptable hors d'oeuvre, let alone a main course. The longer the world goes on paying deferential tribute to the Bretton Woods system the longer the whole business of revaluation and devaluation will remain what it is now — the paying of protection money to bankers.
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