The Monetary Sin of the West

By John L. Hess

March 26, 1972

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Nobody welcomes the bearer of bad tidings, as Jacques Rueff should know. As a major French
economist, he has warned for more than 40 years that our international money game was leading
to catastrophe; he says today, “I'd much rather have been wrong.” Still, duty obliges. While
deprecating the bitter satisfac tion of “I told you so,” Cassandra now assembles the record of his
gloomy prophecies, for our own good, and this time, we had better listen.

By Jacques Buell. Translated from the French by Roger Glemet. 214 pp. New York: The
Macmillan Company. $6.95.

Irony aside, Rueff stands up to being reprinted rather better than most money managers and
economic journalists. He is unkind enough, in “The Monetary Sin of the West,” to recall the
predictions of imminent equilibrium emitted by Robeit Roosa in 1963, Henry H. Fowler in 1965
and Lyndon B. Johnson in 1968. Each of these got a polite Rueff raspberry at the time and, of
course, Rueff was right.

Similarly, the prologue to the American edition was apparently written before the Smithsonian
agree ment, last Christmastime, described by President Nixon as the greatest. But Rueff, who
dismissed the accord in advance as solving nothing, was surely closer to reality than the Es
tablishment, which on the spot pre dicted a return flood of dollars to the United States. We are
still wait ing.

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By its nature, this Rueff anthology is a bit repetitive, but the thesis bears repeating. It was
sounded by the author at least as early as 1931, when he was a junior money mana ger himself.
He advised his Govern ment in a ‐ memorandum that the Great Depression had been provoked in
large part by the inflationary ef fect of the gold‐exchange standard. This was a temporary device
ap proved by the war‐ruined nations of the Continent at a conference in Genoa, in 1922. It
allowed them to use foreign currency—the pound ster ling and the dollar—as reserves in place of
gold. Since the pound and the dollar were convertible into gold, they could be considered as if
they were gold, and the country that owned these monies could issue its own currency against
these holdings.

This expedient had an added at traction that would prove disastrous: The pounds and dollars
could be lent back to Britain and the United States and earn interest there, while at the same time
serving as the basis for the currency of other countries. So Britain and the United States could eat
their imported cake and have it, too. Or, as Rueff put it, it was a child's game of marbles in which
one party had agreed to return the loser's stake. He argued that the hap py two would inevitably
buy more than they could afford, since they never had to pay—in other words, the system could
lead’ only to infla tion and bust. Which arrived in 1929. When the same system was resur rected
at Bretton Woods as World War II ended, Rueff predicted it would lead to the same result.

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By 1961, Europe was in the grip of inflation and Washington suddenly became aware that, if all
foreign holders of dollars were to present them for reconversion, it would not have enough gold
to pay them. There began a decade of efforts to keep the foreigners from doing so—efforts that
were increasingly feverish, some times brilliant, always unsuccessful.

That should be qualified. Swaps, Roosa bonds, increased quotas and special drawing rights—that
“paper gold” which sends Rueff up the wall —never persuaded Zurich gnomes or American
bankers and corporation treasurers that it was safe to hold dollars very long. But each gimmick
staved off a reckoning while the cen tral banks of Europe and Japan were forced to swallow
more billions of dollars. The public, meanwhile, was somewhat allayed by assurances that these
measures were what the doctor ordered to meet the real disease: a threatening shortage of
“liquidity.” Considering that the world was awash with dollars, which were top pling one
national bulwark after an other, the liquidity crisis was an achievement in mystification compa
rable to the disappearance of China in 1949 and its rediscovery in 1972.

In 1958, Rueff helped Antoine Piney put across a stabilization of the franc that was a model of
its kind. In a few months, the nation turned from bankruptcy to a surplus of payments and
growing reserves. (This was in the midst of the Al gerian war, as Rueff would point out in
arguing that peace in Asia would not of itself solve the United States deficit.) But Rueff soon
found that the pressure of inflationary dollars from without was undermining the effort at
equilibrium within.

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A minor revelation in the new book: As a Government adviser, Rueff took his case to Finance
Minister Wilfrid Baumgartner, who is now chairman of France's largest indus trial company,
Rhone‐Poulenc. Baum gartner sent him packing. But Rueff appealed to the world public in a
major article published in 1961 (in Fortune, among others), in which he held that the United
States was ef fectively bankrupt and that it was up to the creditor nations to bail us out. He said
this might be done by doubling the price of gold (catch ing up with the movement of other prices
since Roosevelt raised that of gold In 1933). The United States could thus pay off its creditors
with out reducing its own reserves. (Later, when our debt became too great, he suggested that the
creditors use the added value they got from a gold price increase to consolidate and freeze the
dollar balances.) Most im portant, the trading world would then return to the gold standard: At a
realistic price, there would be enough gold, especially since all nations would find‐ it obligatory
and rela tively painless to avoid payments deficits.

By an end run, Rueff was able to reach the ear of General de Gaulle, with the help of Foreign
Minister Maurice Couve de Murville. The economist's thinking emerges in the General's famous
news conference of Feb. 4, 1965, with its discourse on the evil of the existing system and its call
for reform based on gold. The shock waves were still traveling when the following week, Rueff
ac corded an interview to The Econo mist of London. The exchange, re printed here, is
remarkable not so much for the open hostility of the interviewer (now an I.M.F. official) as for
Rueff's extraordinary predic tion of things to come. Remember, this is 1965:

“… If we continue to operate under the same system, we shall some day arrive at the end of the
means of external payments by the United States. This will mean that, whether it wants to or not,
despite the agreement in the I.M.F. and the GAIT, it will have to establish an embargo on gold,
establish quotas on imports and impose restrictions.”

Bullseye.
It is almost amusing to contrast this forecast with that of Rueff's interviewer, who echoed the
then fashionable threat by Washington to knock the price of gold down to its true value: dental
filling.

The Federal Reserve Bank of St. Louis said in its review last July that the reform proposed by
Rueff might have been worth “serious con sideration” five years ago, but now it was too late.
Privately, Rueff him self seemed to agree. In the prologue to the new book, however, he implies
that wise policy still can save us, al though we have now taken all but the final step to a
catastrophe on the order of 1929.

In a friendly debate with Robert Triffin of Yale, who agrees that the gold‐exchange standard was
a disas ter but favors a new international paper unit rather than gold, Rueff scores by pointing to
the hapless per formance of the present monetary Establishment. Given the option, he says,
money managers in a demo cracy will always choose inflation; only a gold standard deprives
them of the option.

The view that a little infla tion is a good thing is reluc tantly giving way under the hammer blow
of events. Rueft may be less persuasive in his apparent belief that sound mon ey (with only a
modest assist from national credit policy) should guarantee prosperity al most automatically.
This goes back to Adam Smith, but Smith himself was only postulating a model economy, which
did not correspond to the real one he knew—and certainly does not correspond to the French
econ omy that Rueff knows. We may have to find a different mix. Meanwhile, says Rueff, hold
on to your hats.