INTERNATIONAL MONETARY ECONOMICS INTERNATIONAL MONETARY ECONOMICS By MICHAEL A. HEILPERIN, D.Sc. (Econ.) Assistant Professor at the Graduate Institute of International Studies, Geneva LONGMANS, GREEN AND CO. LONDON <- NEW YORK o TORONTO LONGMANS, GREEN AND CO. LTD. 39 PATERNOSTER ROW, LONDON, E.C.4 I 7 CHITTARANJAN AVENUE, CALCUTTA NICOL ROAD, BOMBAY 36A MOUNT ROAD, MADRAS LONGMANS, GREEN AND CO. 114 FIFTH AVENUE, NEW YORK 221 EAST 2OTH STREET, CHICAGO 88 TREMONT STREET, BOSTON LONGMANS, GREEN AND CO. 215 VICTORIA STREET, TORONTO First published ig3g PRINTED IN GREAT BRITAIN BY WESTERN PRINTING SERVICES LTD., BRISTOL To MY COLLEAGUES AND FRIENDS OF THE GRADUATE INSTITUTE OF INTERNATIONAL STUDIES PREFACE T HE scope of this book covers an investigation of the structure of international monetary relations, an inquiry into the nature of monetary internationalism and into the conditions which make its continued existence possible, and an investigation of the consequences of its destruction and replacement by nationalistic monetary policies. While the only successful experience of monetary inter- nationalism (apart from monetary unions) has been under the gold standard, the present study is not primarily con- cerned with that system, even though much of the following discussion will throw light upon its functioning. After defin- ing the nature of monetary internationalism and of its oppo- site, the present inquiry proceeds to discuss what might be called the monetary economics of gold. It is important to determine the action of gold on prices and the part played by gold in the functioning of a monetary system in order to define, later on, its importance for monetary internationalism. There follows a detailed analysis of various problems relating to international payments and their balance, to exchange rates and parities, and to the conditions of monetary stability, which are considered on a fairly broad basis including both national economic policies and international political rela- tions. The experience of the reconstruction of monetary internationalism which was carried out in the middle 'twenties and which collapsed so soon remains a proof of what may happen if in considering monetary matters one confines one- self to the field of purely technical monetary considerations. All economic relations have a monetary aspect; but, recipro- vii PREFACE cally, monetary relations exist only within the framework of an economic "system", and cannot be treated, least of all in practice, apart from other elements of that system. Monetary internationalism is in its essence an international co-ordination of national monetary policies with the view to maintaining monetary stability and the smooth working of international trade and finance. The problem to the investiga- tion of which this book is devoted, international though it be, is therefore closely linked with that of domestic monetary policies. A study of credit organization and policy (including both central and commercial banks and, more generally, the whole credit structure of the various countries) and a study of the monetary effects of public finance policy are necessary supplements to the present inquiry. Until this work is done, various aspects of the problems here analysed will not be entirely elucidated. The discussion contained in the pages that follow is largely discursive, but with the view to laying bare the principal problems which demand a statistical treatment. I consider statistical research most important, though I can hardly accept certain of the statistical methods at present used in economic studies. Some important reservations regarding the use of index numbers, and other statistical constructions are formulated in the Appendix. Within the last twenty years the use of such devices has spread so much that the danger seems very real of forgetting, under their simplifying influence, the heterogeneous reality they are supposed to represent. Our knowledge of economic realities tends to become an index-number knowledge, while it is the changing structure of economic quantities that really matters most, rather than changes in averages. Without going into a detailed discussion of methods, two important statistical inductive inquiries are here submitted to a careful, critical examination: one by Professor Cassel, about the rate of increase of gold stocks that is necessary for the maintenance viii PREFACE of a stable price level; the other by Professor Charles Rist about the relation between gold and prices. Both these inquiries are found wanting and the problem is found not to be a real issue.x A similar conclusion is reached about the purchasing-power-parity theory, the apparent quantitative precision of which does not stand up to thorough criticism. While economics badly needs more quantitative numerical precision, it must be noted that the concepts with which it works must themselves be so constructed as to make quantitative measurement possible. Pseudo-quantitative concepts, the use of which has become quite widespread, are a real menace for the future of economics; this is gradually being realized. The only way of dealing with this issue lies in a careful criticism of the conceptual material used. Thus, in the pages that follow, much attention is paid to the clarification of economic concepts. I particularly want to acknowledge here the influence which Professor Bridg- man's penetrating and challenging book on The Logic of Modern Physics has had upon the formation of my own ideas in that matter of concepts and definitions. I have no doubt whatever in my mind that the whole of economic theory will have to be restated some day in terms of what Professor Bridgman calls "operational concepts". The antithesis that is so often drawn between internal and external monetary stability as objectives of monetary policy, will in turn be challenged in the pages that follow, on the grounds both of insufficient statistical evidence and of inadequate logical justification. The reality of this antithesis is rather disproved than confirmed by the theory of equili- brium in international payments which is developed in this book, while the frequently-made assertion that in pre-war days important comparative price changes in countries losing 1 There is much difference between the views that are widely held in this matter in Great Britain and the United States, and views that are commonly accepted on the Continent. This explains the emphasis laid on that issue. Vide infra, pp. 68 and 69. ix PREFACE gold and in those receiving gold were at the roots of the work- ing of the gold standard, appears to me to be lacking any sufficient factual support. This last issue can, of course, be decided by recourse to statistical verification. While this is a task which exceeds the possibilities of an individual scholar, it is a very proper subject of inquiry for co-operative research to be carried out by a team of able economists. The theory expounded in this book arrives at the conclusion that the mechanism of re-establishing equilibrium in inter- national payments must work through the application of essentially the same instruments of action whatever the monetary system adopted. The real issue, then, is not between the gold standard and free paper currency, and not between fixed parities and flexible exchanges, but between international monetary stability and monetary chaos leading to the adoption of exchange controls and ultimately to milder or more developed forms of state socialism. If "flexible exchanges" are to be associated with a long-run exchange stability (alternative to exchange chaos), then the same type of mechanisms for re-establishing equilibrium must be allowed to work as in the case of the gold standard. The real meaning of the gold standard (or indeed of any inter- national standard) is that it allows the various currencies to be freely converted into one another at fixed rates and thus gives the best practical approximation to a world currency. The other important and distinctive feature of that system is that it can function only so long as conditions of inter- national co-operation prevail and that the passage from internationalism to nationalism must sooner or later result in its collapse, which is not true of other monetary systems. The experience of the 'twenties, to which reference has already been made, shows clearly how hopeless it is to make a system of monetary internationalism operate in a world dominated by economic nationalism and by nationalism tout court. By taking this into consideration, the analysis PREFACE that follows will lead from purely monetary relations into the field of international relations in general, and there it must stop because that field cannot be explored by an economist unassisted by a political scientist, an international lawyer, an historian and a statesman. I shall only endeavour to show clearly how some vital economic issues are not only economic ones. The reader will be interested to turn to the book by the staff of the Graduate Institute of International Studies in Geneva, recently published under the title The World Crisis. An earlier draft of one part of the present book is included in that publication. As I complete this book on the eve of my departure from the Graduate Institute, my thoughts linger around the three happy years I spent as Assistant Professor in that institution, of which, in its early days, I was a student. Words fail me to express all my gratitude for the opportunities that were given me in that school, whose fine, generous spirit of intellec- tual co-operation makes it one of the greatest strongholds of freedom of thought and of the liberal attitude towards the world and men that at present exist on the European continent. I inscribe this book to my colleagues of the staff of this Institute, in the hope that they will accept it as a modest token of my sincere appreciation of the friendship with which they have surrounded me and of the benefit I have had from my association with them. I wish to express my particular gratitude to the two directors of the Institute, Professor William E. Rappard, who has had a determining influence, first upon my training, and afterwards upon my career, and whose friendship has always been to me of un- failing support, and Professor Paul Mantoux, who from the first days of our acquaintance has been the kindest and wisest of guides. I wish to emphasize also what a privilege it has been to work for three years in almost daily contact xi