Short-Term Devaluation

2. Make the Devaluation Short-term Only

2. Devaluation is the second solution when a debtor country is unable to sell enough to pay for its purchases.

There is normally some level for each currency at which exports and imports will balance.

But here again, “balance” is not everything. Equilibrium rates of exchange in many cases may mean disequilibrium somewhere else.

They might, for instance, deteriorate the country’s “terms of trade” as to be unbearable. But these are probably special cases. On the whole, a correct adjustment of exchange rates is the most important.

The establishment of “balance” is the principal criterion for correctness and the object of the changes. This balance is the avoidance of undue cash holdings or debits in the various National Clearing Funds.

Pool Clearing Exchange Rates

Under Pool Clearing, the determination of the rates of exchange comes from the cooperation of the different National Clearing Funds.

No one country is able to settle the rates of exchange of its own currency in opposition to the rest of the world, as has been possible hitherto.

• The US Clearing Fund receives US dollars from a US importer who has bought goods from an exporter in Japan
• It then advises the Japan Clearing Fund of the received US dollars
  • It is up to the Japan Clearing Fund to pay the exporter in Japan at the ruling rates of exchange*

Thus, in order to alter the value of its currency, the US Clearing Fund must first seek agreement with all other Clearing Funds, so that they will actually make their disbursements to their respective home exporters at the new rates.

Can such an international agreement on exchange rates be obtained?

This question sounds more formidable than it really is. Under any system, even in an unorganised one, there must always be agreement between those who exchange currencies. Nobody proposes to leave these dealings entirely unorganised.

Governments are already accustomed to taking a hand in them. Therefore, it will not be too difficult to get some working agreement to start with.

Once a start has been made, it must be left:

• to the actual development of trade (and lending) and
• to a process of trial and error to find those rates of exchangewhich most nearly establish an equilibrium position between the different countries.

Without some organised international effort, this cannot be found and the necessary revisions which changing circumstances demand cannot be carried through. There will be Exchange Equalisation Funds, no matter what system is finally adopted.

These institutions will get into touch with one another to settle policy on a wider or smaller scale. In the current stage of world political development, Pool Clearing does not add to the difficulties inherent in international co-ordination. In fact, the Pool might be merely seen as an Exchange Equalisation Fund on a world scale.

The inner mechanism of Pool Clearing, moreover, itself provides time and inducement for co-operation.

It becomes unattractive to accumulate surpluses. But it becomes also unattractive to all participants to allow the deficit of any country to rise dangerously near its maximum limit. It is in the interest of both potential surplus countries and potential deficit countries to find an equilibrium level of exchange.

Before this, this was not the case. No matter how hard deficit countries might have been striving to reach equilibrium rates, the surplus countries found it useful to hang on to their surpluses and to answer the devaluation of other currencies by a devaluation of their own. Competitive devaluations, under Pool Clearing, would be completely pointless.

After each country accepts the duty of keeping its own Clearing Fund in balance and grants the right to every other country to keep this balance in their own case,there should be some international agency to provide the machinery for reaching common decisions.

The International Clearing Office might fulfill this function. But this would imply that its power and status would have to be raised far beyond that necessary for carrying out the purely formal “trustee” functions of “pooling”, as they have been described.

Our choice in this matter is not very wide:

• we can leave the conduct of economic affairs to a multitude of sectional interests, whether private or national. This shall be at the mercy of forces which have landed us in economic and political disasters.
• Or we can make an attempt at some form of world planning. Such an attempt may be successful, if the strongest nations take a determined lead and accept responsibility not only for the well-being of themselves but for the world as a whole

All economic phenomena, in an era of quick transportation and intensive economic exchange, are interconnected.

It would be foolish to propose that everything should be controlled centrally. But international trade is of fundamental importance as a strategic point of control. It is time for some international control in this field. The object of control* should be merely to:

• achieve balance in the Clearing Funds of the various nations, and
• avoid long-term cumulative surpluses and long-term cumulative deficits.

This would have far-reaching effects also on purely internal policies in the different countries. Internal monetary policies, for instance, exert a strong effect on external trade. A proposal to subject them to international control would appear wholly Utopian. Thus, each nation should be free to do internally whatever it pleases:

• to aim at full employment with all its might
• to distribute its national income according to its own principles or lack of principles
• to control foreign exchange transactions or to leave them uncontrolled, etc.

Its responsibility to the rest of the world should end when it has balanced its Clearing Fund accounts. The primary responsibility should rest on the surplus countries to spend as much as they have earned. A secondary responsibility should rest on the deficit countries to make available, at the right prices, etc., a sufficient volume of goods so that all cash obligations can be discharged in kind.

If an adjustment of the rates of exchange will discharge these responsibilities, the International Clearing Office should seek to arrange it. It is the responsible international agency,

3. Long-term Devaluation

In some cases, the degree of devaluation necessary for “balance” might endanger the vital interests of the country in question.

The country would have to reorganise its industry. It would often mean a change from:

• home production to exports, or
• from one kind of export goods to another, or
• else a curtailment of its purchases.

But a reorganisation within the deficit country alone might not solve the problem. The surplus countries have an equal duty to reorganise so that they can take more goods if more are offered.

In such cases, it might be unavoidable to adopt Bilateralism.

• The exporting country that changes its production structure to export more must know the requirements of the market it is hoping to meet
• An importing country that creates internal changes to add import requirements must know its sources of supply.

Adjustments of this kind are difficult to effect, and even more difficult to enforce.

But these difficulties are not peculiar to Pool Clearing but are inherent in any attempt at international economic cooperation. It is often a matter merely of “Economic Intelligence”, of:

• the spread of reliable knowledge*, and
• the compilation of reliable statistics of productive capacities and human needs

The right direction might be attained by the need for balance, together with a system that makes surpluses unattractive. The great cyclical waves of unemployment was the greatest single factor of disruption in the past. No system is likely to endure unless such waves can be avoided.

Pool Clearing Versus Other Systems

Compared to free international convertibility of currencies, Pool Clearing offers at least one outstanding advantage: its inner mechanism tends to overcome temporary disequilibrium situations in international exchange by expansion instead of restriction. The buyer is given the first move in the game, on the self-evident theory:

• that one country’s imports are another country’s exports, and
• that supply will largely take care of itself if only demand can be liberated.

Thus, the main burden of adjustment is placed on the surplus countries. The system makes them spend their surpluses. This would enable the deficit countries to get rid of their deficits without restricting their purchases. The overdraft facilities for each country expresses the determination to give the buyer the benefit of the doubt, and a means of getting international trade started again after the war, in spite of the shortage of international cash.

This inner expansionist force of the system is its most important feature.

There are other ways to protect countries from the speculative capital movements which this system brings about. The medium-term stability of exchange rates is the minimum degree of international cooperation needed in this field*.

The same applies to the fact that Pool Clearing would make the international payments position of each country “transparent” by summing up its vital aspect in one figure, the debit or credit balance of the National Clearing Fund.

All this can be attained in many ways, not necessarily through Pool Clearing. But can we get this expansionist element into the international system by other means? Is this element something worth striving for?

Only by considering the available alternatives can we decide whether it will be worth it to establish such a system and whether the new risks involved can prudently be taken. At least two alternatives are clearly visible:

1. A continuation of the pre-war trend.

This split up the world’s trading system into innumerable uncoordinated bilateral systems. This is absurd

2. A continuation of the war-time trend

It aimed at the formation of regional economic blocs with some eventual form of multilateral clearing

Economic regionalism might be considered superior to the anarchy of rigid Bilateralism. But it surely cannot be the last word in post-war economic organisation. The above attempts to show just one way of driving a wedge into the solid block of resistance against economic planning on a world-scale.

Other ways exist. They should be fully described and discussed. Some world-embracing scheme, conceived with realism and daring, must be developed to meet the challenge of Bilateralism and Economic Regionalism. Such a scheme should above all have an inherent tendency towards expansion.