grow as their incomes grow. Liquid assets are there to be used in times of temporary shortfalls of receipts below payments. But no individual or business and no nation can afford to see its liquid reserves diminish persistently. Taking all nations together we have observed, and will no doubt continue to observe, a tendency to add to reserves over time. What is needed is a steady and dependable supply of new reserves to satisfy this basic desire of nations to increase their reserves a supply that is neither excessive nor deficient but consistent with the noninflationary growth of the world economy. A once-for-all or once-ina-generation increase in the value of gold reserves resulting from an increase in the gold price is no substitute for a gradual and steady accretion of new reserves. It is precisely this need that the Special Drawing Rights are designed to fulfill.

It has been clear for many years that new gold production alone cannot provide the necessary increase in world reserves. It is equally clear that dollars cannot and should not any longer satisfy a major part of the desired growth in the reserves of other countries. This was the basis for the unanimous decision of the members of the International Monetary Fund at Rio last September to proceed with the plan for Special Drawing Rights.

It has been said, and correctly, that the Rio agreement is a landmark in international monetary history. It is a landmark because it introduces a new concept-the deliberate creation of international reserves as a supplement to existing reserves of gold and foreign exchange. The Federal Reserve System is based on the proposition that "money will not manage itself." The SDR Agreement can be said to be based on the view that international money will not manage itself either. The willingness of monetary authorities to cooperate, through the International Monetary Fund, in the creation of Special Drawing Rights has unmistakable implications: it means that the world will be assured of a growing supply of reserves at the present price of gold. Events of recent months-the shock to the international monetary system following the devaluation of sterling and the strong reinforcement of the U.S. balance of payments program-lend greater timeliness to the implementation of the Rio Agreement. Once the SDR Amendment is completed by the Executive Board of the International Monetary Fund and approved by its Board of Governors, I would hope that governments would proceed promptly to seek ratification from their legislatures.

The Role of Gold

I have said that neither of the two major problems facing the international monetary system calls for an increase in the price of gold. Such a step is neither necessary nor desirable as a solution to the problem of international payments imbalance or to the problem of assuring adequate growth in international reserves. It would be highly disruptive and highly inequitable. A small increase in the gold price would inevitably engender expectations of additional increases in the not-distant future, thus leading both private and official holders of dollars to convert them into gold and negating the increase in international liquidity that the gold price rise was designed to achieve. An increase in the price of gold of sufficient magnitude to avoid arousing

expectations of another such move soon would have to be very large. It would undoubtedly be inflationary, for it would expand, by a corresponding amount, both the reserves of gold holding countries and the purchasing power of private gold holders. Neither a large nor a small rise in the price of gold would increase international reserves in an orderly and equitable manner. Countries with small gold reserves would share very little in the increase in reserves. Other means of increasing reserves of countries-particularly those holding little goldwould be required in any event.

The recommendation of a higher gold price based on the fact that the general price level has risen greatly since the early 1930's while the price of gold has been unchanged mistakenly views gold more as a commodity than a measure of monetary value and a monetary reserve asset. To raise the price of gold because the general price level has risen would be like increasing the length of the yardstick because the average height of human beings has increased.

In addition to these general economic considerations, which argue strongly against raising the gold price, there are considerations of special concern to the United States. A rise in the gold price would break faith with the many nations around the world that have held dollars on the basis of confidence that the United States would stick to its commitment regarding the price of gold.

Those who recommend an increase in the price of gold or are willing to tolerate it seem to me to have decided that monetary management is impossible on an international scale and that we must yield to blind and immutable forces that somehow govern economic destiny. Given the magnificent record of international monetary and economic cooperation we have witnessed in the past twenty years, I refuse to accept the cynical and desperate view that man must turn back to greater dependence on gold.

Let me be unmistakably clear: in my judgment an increase in the gold price would be wholly detrimental to the best interests of both the United States and the international monetary system.

I have been quoted as saying that gold is a barbarous metal. But it is not gold that is barbarous; that wasn't my point. Quite the contrary: gold is a beautiful and noble metal. What is barbarous, when it occurs, is man's enslavement to gold for monetary purposes.

It is important to sort out clearly just what the role of gold is for the United States and for the world economy. The reserves of the United States are mainly in the form of gold, and the international monetary system has as one of its foundations the convertibility of the dollar into gold at $35 per ounce. There are some who believe that the U.S. balance of payments problem could somehow be solved if we cut the link between the dollar and gold. I believe this view is mistaken. In the circumstances ruling in recent years, the United States would have had a balance of payments problem, whatever form our reserves happened to take-for the deficit in our payments inevitably led to a reduction of our reserves. We cannot attribute the payments imbalance to the link between the dollar and gold. We can't solve the payments problem by either cutting the link with gold or by reinforcing dependence on gold by raising its price.

Monetary history, both within and among countries, reveals a steady progression away from exclusive dependence on gold as a monetary instrument. In very few countries now is gold any longer used domestically for monetary purposes-either as a medium of exchange or as a regulator of monetary policy. Supplements to and substitutes for gold have been developed and have taken over gold's role as a monetary asset.

The same development has occurred internationally, and today gold comprises only a little more than half of world monetary reserves, with foreign exchange (mainly dollars and sterling) and reserve positions in the International Monetary Fund making up the other half. The creation and use of SDR's will permit a continuation of this process by which dependence on gold gradually diminishes over time.

Thus, gold which was the major international reserve asset in the past, will continue to be held and used by monetary authorities. But its importance will gradually decline over time as SDR's supply the major part of reserve growth. This evolution, which recognizes the monetary importance of gold but avoids excessive dependence on it, seems to me to be the only rational course for the international monetary system to take.

Concluding Observations

I do not wish to leave you with a false sense of reassurance. The international economy has been passing through critical times and there are serious problems ahead-in the payments relations between the United States and Europe, and in the payments positions of countries in the rest of the world as the U.S. deficit and Continental European surpluses are reduced. Meanwhile, other economic problems need continuing attention, including an adequate flow of capital from the advanced to the developing nations and an effective use of such capital. We must never forget that monetary matters and institutions are not an end in themselves but a means to the end of satisfactory economic growth and stability.

While avoiding false optimism, I do want to leave you with a sense of confidence regarding international monetary problems. A rational and orderly way is discernible through the twin challenges of balance of payments adjustment and adequate growth of international liquidity-a way that takes the Bretton Woods system and the gold exchange standard as a foundation and supplements them as needed with continued international cooperation, on which so much past progress has been based. I have no doubt that our present international monetary system, supplemented and modified gradually over time, can continue to provide a framework for sustained expansion of world trade and payments and, in turn, for uninterrupted advance in living standards throughout the world.

[From Foreign Affairs, April 1969]

THE THRUST OF HISTORY IN INTERNATIONAL MONETARY REFORM

I

By Robert Triffin

S our international monetary system heading toward a sudden collapse as in 1931, or toward the fundamental reforms needed to cure its most glaring and universally recognized shortcomings? Or will it continue to drift precariously from crisis to crisis, each one dealt with by belated rescue operations and the spread of restrictions and currency devaluations? Judging from past history, official statements and even intentions are unlikely to provide reliable answers to these questions, for they are more often designed to reassure than to enlighten. The Governor of the Bank of England, Sir Leslie O'Brien, candidly confessed to a Cambridge audience last spring: "I am rapidly qualifying as an instructor on how to exude confidence without positively lying." Another reason is that major changes in the international monetary system have rarely been the result of conscious planning. They have most often been the by-products of broad historical forces or accidents, defying contemporary forecasts and official intentions.

Official negotiations on international monetary reform were launched, five and a half years ago, with a confident agreement "that the underlying structure of the present monetary systembased on fixed exchange rates and the established price of gold -has proven its value as the foundation for present and future arrangements." (Statement issued on October 2, 1963, by the Secretary of the Treasury of the United States on Behalf of the "Group of Ten" Members of the Fund.)

The snail's pace of these negotiations, however, and the recurrent and snowballing gold and foreign-exchange crises of recent years have spread mounting doubts regarding these two pillars. of the gold-exchange standard. The disbanding of the famed Gold Pool and the introduction of the so-called two-tier gold market in March 1968 were not the planned and deliberate outcome of the negotiations in process, but rather the defeat of fourteen years of efforts to preserve the $35 price in the private as well as in the official market. The optimists-like myself-still hope against hope that these decisions will prove the first, and constructive, steps toward a gradual elimination of gold as the

ultimate and obviously absurd regulator of reserve creation and destruction. The speculators still choose to view it, however, as the harbinger of a further defeat of official policies and of an eventual and substantial increase in official, as well as private, gold prices. Few, if any, observers give much credence to the third interpretation professedly favored by the officials—namely, that the two-tier gold market is a lasting step toward the consolidation of the $35-an-ounce gold-exchange standard of yesteryear.

The second pillar of the Group of Ten policies, i.e. the fixity of exchange rates, is equally assailed today, not only by academics, but even by Congressional leaders and responsible officials, here and abroad. Various forms of exchange-rate flexibility' are seriously discussed and advocated as the only realistic cure for the recurrent foreign-exchange crises involving the major currencies of the Western world, and particularly for the persistent deficits of the United Kingdom and the United States, which both countries have repeatedly promised but failed to correct.

In brief, official intentions and pronouncements appear in retrospect a most unreliable guide to the recent evolution of the international monetary system, and are therefore widely mistrusted as a basis for confidence in its future stability. Far better clues and safer predictions can be derived, in my opinion, from analysis of a broader historical perspective and the persistent trends which emerge so clearly from it concerning the direction of changes in our national and international monetary institutions.

II

The first lesson that history teaches us is that these institutions have always been carried forward by an irrepressible evolutionary process, the strength of which was repeatedly misunderstood, underestimated or even totally overlooked by contemporary observers, academic as well as official. Even today, many people evoke with nostalgia the nineteenth-century gold standard, and

1 The so-called "band proposal" would enlarge the margin between official buying and selling rates, leaving market rates free to fluctuate around a stable middle rate, or par-value. The "crawling peg" proposal would allow the par-value of a currency to depreciate or appreciate, in accordance with market forces, but by no more than 2 or 3 percent per year. The “crawling band" proponents would merge these two proposals, by allowing an enlarged band around a "crawling" par-value. Others would retain the facade of stable rates, but favor special tax and subsidy provisions tantamount to exchange-rate flexibility for merchandise imports and exports.