some re-thinking on the problems of liquidity

SOME RE-THINKING ON THE PROBLEMS OF LIQUIDITY*

by PAUL CHAMBERS

DISCUSSIONS WHICH HAVE been taking place in the International Monetary Fund and elsewhere recently indicate that there is a substantial and possible increasing divergence of opinion on international liquidity. It has been suggested that certain decisions of a far-reaching character such as the creation of an international monetary unit ought to be made fairly soon, perhaps in a year or two's time. Clearly little progress is likely on decisions of this kind unless there is more general agreement as to what should be done and why.

This evening I propose to summarise the two main points of view now current, and by this I mean government points of view and not the points of view of many individuals who have been writing on the subject; then to hark back to some basic principles on the subject of liquidity both within a country and internationally, and after reminding you of the history of this subject after the fist world war to give an indication of my own point of view on this difficult subject. It is not a matter upon which I can be dogmatic and I am most willing to listen to other opinions.

The views expressed by the last two Finance Ministers of the French Govern- ment at the International Monetary Fund meetings differ sharply from those of other countries and in particular those of the American and British Governments.

(a) The American and British Governments are gaining an unfair advantage from the gold exchange standard system which was never intended to work as it does today. These Governments have been incurring deficits for many years on their balance of payments and as a consequence other countries have substantial holdings of dollars and sterling. In this way these other countries are subsidising the economies of the United States and Britain and have been doing so for many years. In effect the United States and Britain have been receiving real goods and valuable services in exchange for their currencies and so long as these holdings are not reconverted into things of value all the advantage goes to the United States and Britain.

(b) The general understanding when the gold exchange standard system was developed was that the countries holding dollars or sterling should be able at any time to convert such balances into gold without any criticism from the United States or Britain. The actions of the French Government in converting the greater part of their dollar holdings into gold, i.e. requiring the United

Briefly the French argue :

'Addrew by Sir Paul Chambers on 2nd November 1966 to the Johannmbuq Branch of the Economic Sodety of south Africa.

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T H E S O U T H A F R I C A N J O U R N A L O F E C O N O M I C S

States Government to give gold in exchange for dollar balances, has been unfairly criticised. The arguments that, if the dollar and sterling holdings of other countries fall sharply as a result of the attempts of the American and British Governments to convert their deficits into surpluses in the future, there will be a general shortage of international liquidity, is unsound. On the contrary, the French argument runs, there is a l r d y too much liquidity and th is excess international liquidity has been financing the inflationary policies of the United States and Britain. The proposals for the creation of an international money in one form or another is inflationary and unnecessary.

The British point of view has been explained by Mr. James Callaghan, Chancel- lor of the Exchequer, at the meeting of the International Monetary Fund in September, 1966, but some of the elements of this policy can be seen in an address given by Mr. Harold Wilson to the American Chamber of Commerce in London in May, 1963. These views are: (a) That the United Kingdom balance of payments deficits must be stopped.

On this point there is no difference between the British and French points of view.

(b) That the restrictive measures taken and being taken by Britain will result in a surplus in Britain’s balance of payments in 1967.

(c) That the measures taken can secure t h i s result without doing harm to the British economy. In other words it will get rid of the overfull employment and the over-heating of the economy without causing widespread and prolonged unemployment and industrial stagnation. The Government view is that the gross national product of Britain will continue to rise during 1967 but at a slower rate and that one of the measures, i.e. the complete ban on wage increases in 1966 accompanied by a strict control of prim, must be followed in 1967 by a period of not less than one year of severe restraint.

(d) An international unit of money is necessary and indeed will be imperative if the United States and Britain convert the deficits on their balance of payments into surpluses. The view is also expressed, particularly by Mr. Harold Wilson in his address in 1963, that only if there is improved international liquidity by the creation of international money will it be possible to extend to the underdeveloped countries the aid which these countries need.

The views of the representatives of most of the other Governments which arc members of the International Monetary Fund accord much more closely with the British view than with the French. Insofar as it is sometimes implied that a Government has some ulterior motive in adopting the stand which it has taken, I think that any such implication should be disregarded if we are trying to examine the main problem of liquidity objectively.

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S O M E R E - T H I N K I N G O N T H E P R O B L E M S OF L I Q U I D I T Y

In order to make what follows reasonably clear, I must spend a few minutes reminding you of some of the basic principles of liquidity.

If we consider the concept of liquidity from the point of view of a single business enterprise we at once recognise that different assets have different degrees of liquidity and that it is desirable not merely to have a lot of money in the till or at the bank, but to have also some assets which are expected to be convertible into money at various points of time in the relatively near future. Every sound management wishes to maximise the profits of the enterprise over a period of years and recognises that it is less profitable to hold cash or money at the bank than say to hold short-dated securities which earn interest. All the assets of an industrial enterprise can be classified according to their degree of liquidity starting from the most liquid such as cash in the till or a balance on current account at a bank and working up from deposit account, short-dated Government securities, marketable securities, to debtors which are expected to pay up in the near future, working capital in the form of stocks, fixed assets with a short life in which the cost is recovered in the form of profits over a period of two or three years, longer term productive assets which pay off over a much longer period, and finally to such assets as the investment of money in large plants not yet in operation and not expected to be in operation or yielding profits for some years to come. On the other side there is of course the ownership of the company's equity

capital, and claims on the company in the form of long-term debentures and loan stocks, shorter term loans and trade creditors. The degree of urgency of these claims on the assets is roughly in the order in which I have placed them, the ordinary shareholders being entitled to repayment only after all the creditors have been satisfied and at the other end of the scale there are the trade creditors who are entitled to payment either at once or within the near future and who can take legal action if there is any default.

There must always be a careful balancing of the degree of liquidity needed, having regard to the timing of accruing liabilities, the timing of inward cash flows, and the need to be as profitable as possible. The demand of such a firm for cash in the till, money at the bank or on deposit, is a demand for a balance which can cover the variations between inflow and outflow of money. The greater the variation between the expected inflow and the expected outflow of money, and the greater the uncertainties, the greater will be the need for such balances and therefore the need for liquidity.

It follows from this that although what are called liquid assets are unrealised claims and do not appear to be real assets, the ownership of these claims including bank balances gives the enterprise in question a degree of liquidity and a room for manoeuvre which is itself a profit-earning asset, however intangible it may be.

We all know of course that in the past the most liquid asset of all was a precious metal, gold, and to some extent silver as well but for our present purpose we can ignore silver. The general acceptability of gold made it an excellent asset to hold, earning no profit except that which accrues from its liquidity.

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The issue years ago by various gold merchants of gold deposit receipts, in which the recipients had faith, increased the degree of liquidity which the recipients of these receipts could have without holding gold itself. As this method of increasing liquidity developed the central banks and subsequently Governments themselves took over the issue of paper in exchange for gold and there was thus a corresponding development of the practice of holding bank or Government currency notes because of their liquidity. In exchange for the issue of these notes the Government received gold or real goods or services, but the people concerned needing the liquidity were prepared to give up directly or indirectly other real assets because of their desire for liquidity.

Again, as is familiar to everybody here, the amount of liquidity was much further extended with the development of the banking system and the steady substitution of bank balances for holdings of currency notes. If a country’s Government or its banks generated more liquidity than was required the value of its money fell, i.e. prices rose. In other words the amount of liquidity given by each unit of money fell as the number of units increased. So long, however, as there was the requirement to convert into gold at a fixed rate, there were limits beyond which a country could not increase its note circulation or its bank credit without losing gold. Once it abandoned the link with gold there was no limit to the extent to which the issue of more of these forms of credit could reduce the value of the country’s money. The total amount of true liquidity within the country, given the fall in the value of money could, and frequently did, decline with the inflation of the currency because of the tendency to discount the future value of the currency.

When we turn to the international field we find that there is something in common with the liquidity conditions within a country and something which is different.

Before the 1914/18 war, one country could require another country to give gold in exchange for any balances which it or its citizens had acquired in the course of ordinary trade or in any other way. The system under which a country held gold or claims to gold, in order to cope with the fluctuations in its international payments, i.e. to have a desirable degree of liquidity was the international counterpart of the internal liquidity system within each country. The second aspect of avoiding too great an i d o w of gold because it limited correspondingly the holding of other assets such as short term bills which earn interest is illustrated very well in the correspondence between Benjamin Strong, Governor of the Federal Reserve Bank of New York and Montague Norman, the Governor of the Bank of England, in those exceedingly important years following the 1914/18 war when Britain struggled to get back to the pre-war parity with gold. Governor Strong complained at one stage of the undesirability of holding so much gold because it was so un- profitable, and this is exactly the same as what might be said by the Chairman of a company finding they had too few earning assets and too much money on current account at the bank.

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S O M E R E - T H I N K I N G O N T H E P R O B L E M S O F L I Q U I D I T Y

If we now turn to the arguments of the French Finance Minister, in the light of this brief and over-simpsed analysis, we can see that there is a good deal of substance in some of the points which he makes. Any Government that can succeed in getting other Governments to hold its money or claims to its money as a liquidity asset, i.e. as a reserve asset to deal with its fluctuation in the flow of claims inwards and outwards, succeeds in getting real goods and services for something which has cost the issuing country nothing. Insofar as each country has a fluctuation in the nett flow of claims so that in some years there is a surplus and in other years a deficit, no particular advantage accrues to any one country by reason of the holding by another country of its money or claims to its money as a reserve or liquidity asset. But if any one country continues year after year to run deficits in its balance of payments then a much greater proportion of the liquidity required by other countries for the purpose of world trade including capital transactions goes to the advantage of the country running continual deficits. It can fairly be argued therefore that such a country is getting real goods and services over a period of years from other countries but giving nothing in exchange except a degree of liquidity which could be provided by other countries or by all trading countries acting together.

Many years ago, before the 1939/45 war, I was concerned in a discussion about the creation of a new currency by a country in the Middle East which wanted to get away from the existing position in which all its internal transactions (as well as its external transactions) were conducted in a currency of a much larger country. Let me hasten to add that the countries in question did not include Britain or the United States or indeed any major European country. The exercise therefore was to replace a foreign currency which was used as internal legal tender with a new national currency. What at once became obvious was that as the foreign currency had been acquired steadily over many years, the operation of substituting an internal currency involved asking the citizens to hand to the central bank all their holdings of the foreign currency in exchange for the new internal money. The foreign currency then was to be submitted to the original issuing country in exchange for credits which could be converted into real goods and services. It is quite clear that up to the point when the internal currency was substituted, the foreign Government had been getting an advantage even more obvious than that of having its money or claims to its money used as balances for external purposes, because the needs for internal liquidity of another country were being satisfied by the issue of paper currency which cost the issuing country no more than the cost of printing.

Whether or not the gold exchange standard was ever intended to work in the way in which it does may be arguable, but there is no doubt that the manner in which the deficits of Britain and the United States have been financed has enabled these countries to get substantial quantities of goods and services from other countries over a period of years while giving nothing in return other than the doubtful liquidity value of near-permanent holdings of sterling and dollars.

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T H E S O U T H A F R I C A N J O U R N A L O F ECONOMICS

I have explained, however, that the liquidity value of any holding or claim can extend only to the need of the holder to cope with fluctuations in his claims payable and his inward flow of cash. The same is true as between countries and there can be no long term advantage in holding large amounts of sterling and dollars in excess of what is needed for liquidity in the generally accepted sense. If a country which wishes to cash these sterling or dollar balances is told that it ought not to do so for some international reason, the whole purpose of holding such balances for the purpose of liquidity disappears.

The argument that the volume of world trade requires a substantial volume of so-called ‘international’ liquidity requires examination.

First, insofar as individuals hold balances for liquidity purposes as I have described above there is in no quantifiable sense a total sum of liquidity. It is true that one can add up the sum of the money in existence and the bank deposits and get a figure of these two liquidity assets. But, as I have said, each individual aims to hold assets with different degrees of liquidity and that for example inward debts due are regarded as more liquid than certain other assets, but the debts due to one man which is in a sense part of his liquidity holdings is a claim by another and the mere adding of all assets which have some degree of liquidity does not give a true picture of the extent to which the individual firms are liquid or illiquid. Insofar as there is permanently a substantial volume of individual debts out- standing the liquidity of the individuals or firms in the country is to that extent increased. The same is true as between countries. When, however, a country such as Britain has incurred such large debts (represented by sterling balances owned by other countries) that it can no longer afford to pay for desirable or necessary imports without the assistance of other countries, it is in a very illiquid state - similar to that of an individual who has got badly into debt. Insofar as other countries are correspondingly liquid because they own sterling balances it must be admitted that as the deficits incurred by Britain have been due to internal inflation, this internal inflation is to some extent exported to other countries if their degree of liquidity is increased by their holdings of sterling.

This problem of exporting inflation is by no means new and the extent to which Governor Strong struggled to assist Britain to get back to the old parity with the dollar (4.8665 dollars to the f ) without causing inflation in the United States is a clear example.

The reverse is also true. A country which deflates violently to improve the external value of its currency can export depression as was shown in the tragic years which followed Britain’s return to the gold standard in 1925.

All this is I think relevant to the actions which are being and which may be taken by Britain and the United States to rectify their balance of payments and the further steps which may be taken to increase international liquidity by the issue of an international money to MI the gap in international liquidity which it is said will exist when the growth of dollar and sterling balances is stopped.

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The measures taken by Britain are of a threefold character, namely,

(1) cutting down internal purchasing power by monetary means including high interest rates, instructions limiting lending by the banks, hire purchase restrictions and the advance collection in 1966 of about f300m of selected employment tax to be repaid next year,

(2) extra taxation, notably purchase tax and additions to other indirect taxes, and (3) the freezing of wage rates at their current level with the corresponding attempt

to freeze or limit prices. It is questionable whether the sum total of the measures taken in Britain

amount to a policy which long term will remove the basic elements of inflation. Undoubtedly they will cause a severe cutting back of internal demand in the immediate present, but insofar as they rely upon monetary as distinct from fiscal measures, the reversal of the monetary measures is likely to lead to a return to inflationary conditions. The need to rely more upon fiscal and less upon monetary measures has been stressed by Mr. Schweitzer, Managing Director of the Inter- national Monetary Fund, and subsequently reiterated by Mr. O’Brien the new Governor of the Bank of England.

It might be argued that the tax increases constitute adequate action on the fiscal side but in fact levels of taxation in Britain are so high, particularly direct taxes on both companies and individuals, that further taxation cannot have the same deflationary effect as increases when the taxation takes a smaller proportion of the national income. Reductions in Government expenditure have been made but these seem to me to be inadequate. I will not go into this subject of further cuts in British Government expenditure this evening. To my mind valuable though the monetary measures have been, including the incomes policy, they are short term measures and the return of inflation is inevitable as these measures are reversed, unless there is a much stronger attack on Government expenditure.

The struggle to deal with internal inflation in the United States after the 1914/18 war had its counterpart in the great problem in Britain of deflating in order to bring the E back to prewar parity, and undoubtedly the extent to which truly deflationary measures were taken in Britain in order to re-establish the old parity not only caused the deepest depression in Britain, but this depression was steadily exported not only to the United States but throughout the world when the former inflationary pressures collapsed.

There is a genuine desire in Britain today neither to allow inflation to return nor to carry deflation to the point of causing continuing and deepening depression. I doubt however whether the right measures have yet been taken to put the internal economy on a sound basis so that there can be an adequate degree of liquidity internally, a moderate surplus on the balance of payments, and no return to inflationary conditions when the need for the current internal restrictions imposed for balance of payments reasons has disappeared.

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In other words, causing temporary illiquidity without changing the basic fiscal cause of inflation does immediate harm with no long term benefit, because monetary measures of this kind have to be reversed and if they are reversed while the fiscal cause of infiation remains there must be a return to inflationary conditions.

If there is no true surplus of an enduring character on the British balance of payments, there is obviously no prospect of Britain being able to assist under- developed countries. Moreover the easing of international liquidity by the creation of an international money cannot enable Britain to make any genuine contri- bution to the needs of under-developed countries so long as it is not in a position to contribute real resources.

At the I.M.F. meeting this year Mr. Callaghan seemed to imply that the creation of what he described as a new international asset would somehow create new resources of a real character available to be used to assist under-developed countries. The creation of additional liquidity can only be of value if it brings into use substantial unused real resources. No doubt underdeveloped countries may see in the creation of a new international form of money a means whereby they may be able to acquire claims on the real resources of other countries. Insofar as money is created internationally for the purpose of assisting such countries without there being a clear understanding that real resources do not come out of the air, but come out of the production of other countries, there is undoubtedly a danger that this new international money could become the basis upon which world-wide inflation could develop.

Even when a gold standard is not operative any country can control inflationary pressures by limiting the creation of internal credit unless the government is too weak to exercise effective economic control within its borders. There are of course such countries. Most of the countries of Western Europe and North America have governments which are, if pressed, strong enough to prevent internal infkition. Each such country has however a central government which can exercise sovereign powers. When we come to a collection of governments, members of the Inter- national Monetary Fund, there is no powerful sovereign authority. If it is true that a country may have a government too weak to stop internal inflation, it is still truer that a collection of governments acting co-operatively is unlikely to be able to control the inflationary pressures of the issue of an international money. The pressures are likely always to be idationary, particularly the pressures from those countries which are too weak to control inflation internally, and the only means by which the stronger governments can exercise any veto would be to refuse to hold the new international asset as Mr. Callaghan has called it, but this would mean the frustration of the whole exercise. Mr. Callaghan said that all countries must share both in the distribution of any new asset and in the responsi- bility which comes with the creation of international money. He also said that the responsibilities will fall most heavily on the major countries which play the biggest part in the world's trade and payments, and that no scheme which failed to reflect these two principles could be expected to work successfully over the years.

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He admitted that at the Group of Ten meeting at The Hague last July almost all the unresolved questions were concerned with just this problem. When however he goes on to suggest that this may be a case where it may be best to leave the principle so far as possible to apply itself, I feel that he may be showing the optimism of somebody desperately anxious to see a scheme succeed because he believes that such a scheme would somehow enable Britain to play an increasing role in giving aid needed by the under-developed countries of the world.

I feel however that the support by under-developed countries for the creation of a new international money in the name of increasing international liquidity may be due to their hopes in effect of getting something for nothing out of such a scheme. I believe also that the support of this scheme by some of the countries with stronger currencies may be based upon their firm belief that when dollar and sterling deficits have disappeared there will be a shortage of international liquidity. On the question of the quantity of international liquidity, I believe that there

is a good deal of misunderstanding. If major countries with currencies that are used in international trade eliminate their deficits on current account so that there is no doubt in other countries that these currencies are strong and are convertible into gold on the basis of known ratios, the desire to hold those currencies for liquidity purposes will mean a growing demand for holdings not only of sterling and dollar currencies but of the currencies of other countries such as France, Germany and so on. If this is so the liquidity which is necessary for aid to and investment in under-developed countries will be a matter of deliberate action by each of the countries concerned and there would be no need for the creation of an international monetary unit to deal with a possible shortage of liquidity which would in any event dislppear when confidence and the genuine capacity to make real overseas investments is re-established both in Britain and in the United States.

Perhaps the danger of inflation on an international scale is greater than that of depression on an international scale, but the experience after the 1914/18 war of depression on an international scale should guard us against the easy as- sumption that we know how to deal with depression. Attempts both by Britain and other countries to get back to an impossible ratio with gold and therefore with dollars led to such a restriction of credit as to cause world wide depression which lasted for many years despite all efforts to reflate. I am by no means certain in spite of the writings of Maynard Keynes and in spite of the workings of the International Monetary Fund and the International Bank that we yet know how we would deal with a spreading depression due to the wrong methods of coping with inflation, and in particular to the use of monetary methods to increase the value of one currency or another. Once confidence has declined and true liquidity has also declined, the task of re-establishing both is I believe altogether more complicated and more dacul t than is generally believed.

The conclusion therefore that I come to is that not only must Britain, the United States and other countries get their balance of payments right, but they

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must do this without doing long-term damage to their economies and do it in a way which does not involve the reversal of monetary measures and therefore the return to inflation : secondly, that there can be no sound international unit because there is no sovereign authority which can have the powers necessary to secure the right degree of inflation or deflation internationally. Finally as Britain and the U.S.A. aim to have their international payments reasonably in balance there should develop a system of holding the currencies of a number of countries based on gold so that the whole advantage of having a country’s money held by other countries for liquidity purposes did not go to Britain and the United States alone.

I doubt very much whether agreement is ever likely to be reached on the subject of issuing an international money. Nor do I believe that an international money can be effectively controlled without an international authority with the powers of a World Government.

If, however, in the process of rectifying internal inflation either Britain or the U.S.A. do cause deflation or depression on an international scale, what other measures are available?

One is independent, or unilateral devaluation and the other is a general revaluation of gold.

Devaluation is, of course, an act of bankruptcy by a country. When the country concerned is unable to redeem its currency on the terms upon which that currency was issued, it is insolvent. To ask its creditors to accept less, in terms of gold or claims convertible into gold, is asking creditors to compound the country’s debts.

But bankruptcy is not always a dishonourable thing. If a country’s insolvency arises from the cost of defending itself against an aggressor, a composition with creditors during or after the war may be the only sensible course. Undoubtedly this would have been the sensible thing for Britain to have done soon after the First World War, instead of committing the heroic and immensely damaging folly of trying to bring down its internal price level to parity with that of the United States in order to avoid devaluation.

History has shown that when there has been a build-up of substantial insolvency by a country, then, just as with an individual, the damage has already been done and less further damage to creditors and debtors alike will be done by a composition with creditors, i.e. devaluation, than by soldiering on in a state of chaotic illiquidity and economic depression. Devaluation, like other acts of bankruptcy, is the first step towards restoring liquidity.

But bankruptcy due to mismanagement or fecklessly living beyond one’s means is not so excusable. If an individual repeatedly becomes insolvent in this way, quite other action than the white-washing process of bankruptcy has to be taken.

The same is true of countries that live beyond their means and constantly run into trouble. They will not be trusted, and other countries will not come to their aid but will leave them to struggle in their state of penury and illiquidity.

If, however, an individual finds himself temporarily unable to meet his com- mitments, but is not basically in an unsound condition except for this temporary

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illiquidity, his liquidity may be restored by some economies and by some temporary accommodation.

Again, the same is true of countries. After the First World War, Britain’s condition was such that an early act of bankruptcy, i.e. devaluation, was not merely desirable but essential for the healthy restoration of economic conditions, not only in Britain, but in other countries. After the 1939/45 war, Britain com- mitted another act of bankruptcy and this enabled her to make steady progress in making good the damage done by that war. Now in 1966 Britain is faced with a similar crisis and it is inevitable that the question should be asked, should Britain devalue yet again or is the condition much less serious so that some temporary accommodation, accompanied by an appropriate degree of belt-tightening, would be more appropriate?

I fear that the crisis in 1966 cannot be attributed to anything other than fecklessly living beyond our means and it is not so excusable. I also believe that the difficulty is much more like that of the individual who is temporarily illiquid but not basically unsound. Britain’s exports of goods and services are per head of the population higher than those of any other major industrial power and her goods are not uncompetitive in price. The trouble lies in a degree of inflation which causes an excessive expansion of imports. In these circumstances the course being adopted, i.e. temporary accommodation accompanied by belt-tightening, is in my view right. Unilateral devaluation again and in present circumstances would undoubtedly do severe and perhaps prolonged damage to Britain’s credit overseas. As I have explained, I am concerned that the form which the belt- tightening is taking is inappropriate and may do more damage than the British Government thinks likely, but that is mainly an internal matter.

Generally, upwards revaluation of gold is, of course, quite different from the unilateral devaluation of one country’s currency. Justification for a general revaluation of gold could never be founded upon the illiquidity in one or two countries alone. Its justification could only be that there was a general state of illiquidity throughout the world.

If there is a general state of international illiquidity, revaluation of gold is a better solution than the creation of a world monetary unit. But obviously it has serious problems because of the inequities involved. Those countries that have large stocks of gold would gain and those who happen to have large holdings of foreign currencies, e.g. U.S. dollars or sterling, would be relatively worse off with corresponding advantages to the U.S. and Britain. It is conceivable that agreement might be reached for the revaluation of gold in order to increase international liquidity immediately following the elimination of the U.S. and British balance of payments deficits subject to the condition that adequate compensation were provided for holders of excessive balances of sterling or dollars. Such compensation would presumably take the form of requiring some part of these balances to be repayable at the old gold parities, this part being the excess of the holdings over some arbitrary figures representing the holdings required for normal trading, i.e.

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normal liquidity needs. In my view it is extremely unlikely that the American or British Governments would be prepared to agree to revaluation on such a basis, or that other governments would agree to it without some such compensation.

I am inclined to believe, however unpalatable as this may be here, that while a general revaluation of gold soon after the war and even a few years ago might have been very sensible, the need for it has declined, and the possibility of agreement to it to-day is remote. There is no international illiquidity at the present time and it is less likely to develop when the balance of payments deficits of Britain and the United States are eliminated than is feared in some quarters.

If all the major countries have sound economies and there is confidence in the future, the amount of credit necessary to conduct world trade is likely to be forthcoming through the existing machinery of the International Monetary Fund with the retention of the gold standard. That machinery is to-day very efficient.

The firm resolution to maintain gold as the basis of main world currencies, does not, however, mean that automatically there will be the right degree of international liquidity. The maintenance of sound economic conditions within these countries is an essential pre-requisite. There will always remain the danger of too much or too little liquidity and the danger, therefore, of such disruption of the economic conditions in some of the countries as to lead to world-wide depression, as after the First World War. In my view, however, there is no reason whatever to suppose that wise action is more likely to be taken to maintain stability if there is a world currency, than if the separate currencies of the many countries are based firmly on gold. The quantity of gold is not dependent upon the decision of a weak government or group of governments and is therefore much the firmest basis for liquidity. The maintenance of the right superstructure of credit to prevent either inflation or depression requires skill and restraint but is more likely to be achieved with gold as the basis. Moreover, given the variations which are possible in the credit superstructure, an increase in the value of gold-once the major economies of the world are in reasonable equilibrium cannot, by itself, insure that there is the right degree of international liquidity.

London.

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some re-thinking on the problems of liquidity

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