The Problem of International Liquidity and the Multiple-Currency Standard

The Problem of International Liquidity and the Multiple-Currency Standard

The Problem of International Liquidity and the Multiple-Currency Standard

The Problem of International Liquidity and the Multiple-Currency Standard

Excerpt

The many plans that have been devised, in the last few years, for a more or less radical change in our international monetary system owe their existence to the fear of their authors that the international-liquidity reserves will sooner or later become so scarce that the western world will, unless appropriate measures are taken, be forced to follow a deflationary policy--with all the disastrous consequences which such a policy entails.

The argument--by now well known to every economist--is, in a nut- shell, this: Gold production adds far less to the monetary gold stock than is required for the latter to keep pace with the expansion of international trade or Gross National Product of the western world. Therefore, the dollar reserves of countries other than the United States must continuously expand in order to make up for the growing deficiency of gold reserves. An increase in dollar reserves, however, would require the United States to run a deficit in its balance of payments. Even if the surplus countries had, up to now, been taking the accretion to their foreign-exchange reserves entirely in the form of dollar balances, they could not be expected to continue doing this once American dollar liabilities rose to an amount several times that of the American gold stock. As it is, the monetary authorities are even at present not willing to accumulate dollar balances to the extent of the whole of their countries' balance-of-payments surpluses, so that such surpluses cause, in part at least, a loss of gold for America. Clearly, then, the United States cannot afford to go on running a deficit indefinitely. But if it does not do so, there is bound sooner or later to be a scarcity of international reserves in the western world.

For the purpose of the present discussion, I accept this diagnosis of the fundamental weakness of the present gold-exchange standard; but I feel I must at least add that I do not think the scarcity of international reserves is a very imminent problem. Nonetheless, it is the economist's job to think in time about possible solutions for the dilemma to which I have referred. This sort of thinking has produced such a galaxy of . . .

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