Improving World Liquidity

Abstract

The experiment in convertibility launched a year ago faces the same two problems that contributed so much to the early wreckage of a similar experiment some thirty years ago — the shortage of gold and, largely in consequence of that shortage, the undue reliance on national currencies as international reserves. The ratio of world monetary gold stocks to annual imports has fallen persistently throughout the post-war years to less than 40 per cent in 1958, compared with 110 per cent in 1938. The International Monetary Fund recently estimated at $ 700 million a year the total increase in monetary gold stocks that can be expected in the foreseeable future from new gold production and Russian gold sales in Western markets. This is less than 1.5 per cent of current world reserves — of gold and foreign exchange — compared with the annual growth of about 5-6 per cent in the volume of world trade and manufacturing activity in most post-war years. It is evident that in the years ahead gold alone will not ensure the maintenance of adequate reserves in an expanding world economy. If new ways of economizing gold cannot be found — as they were found in the nineteenth century — current trends must lead, sooner or later, to widespread deflation, devaluation or the reimposition of trade and exchange restrictions.

This paper is reprinted, by permission of the Editor, from The Banker, January 1960. At the Round Table, participants were provided with copies of the two articles from the Quarterly Reviezv of the Banca Nazionale del Lavoro mentioned in the next footnote.