BANK FOR INTERNATIONAL SETTLEMENTS
ADDRESS BY PROF. JOHN PERCIVAL DAY, B.A., B.SC., D.PHIL., ASSOCIATE PROFESSOR OF
ECONOMICS, MCGILL UNIVERSITY
9th January, 1930
PRESIDENT EAYRS introduced the speaker.
PROFESSOR DAY was received with applause, and said:
I thank you for the opportunity of addressing this Club--a
privilege which I highly prize--and I thank you, Mr. President, for the
kindly words in which you have introduced me. I will speak to you about
the Bank for International Settlements. On the 16th of September, 1928
the six Governments most concerned with Reparation payments agreed at
Geneva to set up a Committee of Experts for the purpose of drawing up
proposals for a complete and final settlement of the reparation problem.
The chairman of this Committee was the American, Owen D. Young, and
their proposals are known as the Young Plan, without implying that Mr.
Young had any more to do with it than any other member. It was one of
the proposals of the Young Plan that a Bank for International
Settlements should be established. Before discussing this Bank, it is
advisable to remind ourselves of the outstanding features of the Young
Plan as contrasted with the Dawes Plan which has been operating since
1924. The Young Plan fixedwhich the Dawes Plan did notthe total amount
of annuities which Germany has to pay and the period during which the
payments have to be made. According to the Plan the last payment will be
made on the 31st March, 1988. This definite fixing of the final payment
is clearly a factor of great importance; it gives Germany the
encouragement of seeing the end of the road, and an inducement to
co-operate, which were both formerly lacking.
The second great change was the handing back to Germany of the
transfer problem. Under the Dawes Plan, Germany's obligation was
definitely limited to providing the money in German Reichsmarks and the
business of getting it out of Germany into foreign currencies was
entrusted to the Transfer Committee of the Allied creditors. Now under
the Young Plan the Transfer Committee vanishes and it is Germany's
obligation herself to deliver the annuities in foreign currencies to the
value of 660 million Reichsmarks a year unconditionally, and, as to the
residue, with the safeguard of conditional postponement of transfer for
a period not exceeding two years. It was also part of the plan that the
nonpostponable 660 million Reichsmarks should be mobilised or
commercialised; that is to say, bonds should be sold to the investing
public to an amount representing the capitalised value. This would
enable the Creditor countries to receive the capital values at once,
leaving the annuity payments to be handed over to the bondholders.
The Young Plan, restores fiscal autonomy to Germany; it involves
the abolition of the various foreign Commissions at present operating in
Germany--the Agent-General for Reparations, the Transfer Committee, the
Commissions for Industrial Debentures and so forth--but it requires
some external, financial, and non-political authority to act on behalf
of the Creditor Powers in the receipt and distribution of the annuities,
in co-ordinating and controlling the arrangements for the
commercialisation of the unconditional annuities, and for cognate
purposes. It was for these responsibilities that the Young Plan
advocated the establishment of the Bank for International Settlements.
The plan of the Bank was outlined in the Young Report; on the
14th of November, 1929 a special Organisation Committee at Baden Baden
drafted and published the Charter of the Bank and we are now waiting for
the necessary treaties between the Powers to provide the basis for the
application of the trust agreement. The Bank is to be located at Basle
and to receive a charter from the Swiss government; its capital is to be
500 million Swiss francs, the subscription of which is guaranteed in
equal parts by the Central Banks of the seven Powers concerned; Britain,
Germany, France, Belgium, Italy, Japan and the United States. Special
arrangements, however, had to be made to meet the case of the United
States. If that country is willing to cooperate officially--which is
most improbable--the Bank's charter definitely stipulates for the
Federal Reserve Bank of New York--and not the Federal Reserve Board--to
be the representative, but if the Federal Reserve Board of New York is
not allowed to co-operate, an invitation will be extended to some
private banking institution or group.
The management of the Bank is to be vested in a Board of
Directors composed of the Governors of the seven Central Banks or their
nominee substitutes, also seven persons representative of finance,
industry, or commerce, one nominated by each Governor. The Bank of
France and the Reichsbank have each an additional appointee so long as
the reparation payments are incompleted. If any other country has
subscribed to the capital of the Bank, its Central Bank may submit the
names of four candidates of that nationality for a directorship. From
the lists so submitted the existing Board may elect by a two-thirds
majority not more than nine persons. The only way, therefore, in which
Canada could be represented on the Board is for some person or
institution in Canada to receive and take the opportunity to subscribe
towards the capital. The Board will then by a two-thirds majority select
some Canadian financial institution--as we have no Central Bank--to
nominate four candidates, and one of them might be elected.
Strictly speaking, the shareholders as such have no voting
rights, but arrangements are made for a general meeting to be attended
by nominees of central banks and these nominees have voting rights in
proportion to the number of shares subscribed in their country.
Thus the control of the Bank is entirely in the hands of Central
Banks. That is an important point. The job of the Bank is mainly a
technical job, and they want it kept in the hands of technical experts,
and to keep out the politicians as much as possible. Important
alterations in its constitution are only possible by an Act of the Swiss
Government in agreement with the governments signatory to the proposed
international treaty.
What is the Bank supposed to do? In so far as the Bank is to be
an organ of external administration of the German annuity payments, it
is obvious that some such authority had to be established and that, when
established and handling such large sums, it is bound to have
considerable influence in the money markets of the World. The real
interest of the new institution, however, does not lie there. A much
greater importance and a much more powerful role have been forecast for
it. It is the logical result of banking progress and the coping stone of
the edifice of the financial organisation of the World. Just as in most
countries of the World the banking system has been given coherence and
leadership and made stronger and more economical by the establishment of
a Central Bank--or, at least, of the central banking principle--so in
the World as a whole is there to be this Super Bank, co-ordinating,
steadying, and strengthening,--perhaps eventually establishing a
rational control of the purchasing power of gold. These are big claims
and big hopes, but they are circumspectly forshadowed in the Young Plan.
"The use of the Bank's credit by central banks within moderate limits,
and over short periods, may in time become a normal function scarcely
different in its exercise from the use of control bank credit by banks
and bankers." "In the natural course of development, it is to be
expected that the Bank will in time become an organization, not simply,
or even predominantly, concerned with the handling of reparations, but
also with furnishing to the world of international commerce and finance
important facilities hitherto lacking. Especially is it to be hoped that
it will become an increasingly close and valuable link in the
co-operation of Central Banking institutions generally--a cooperation
essential to the continuing stability of the World's credit structure."
This Bank is to be a great and promising experiment in an untried field.
The centralization of the World's gold reserves in its keeping would
render possible and safe, when necessary, a greater expansion of credit
and thus avoid that indefinitely long stretch of falling prices, with
all their depressing influence on trade, which otherwise, and failing
the discovery of new gold mines, is thought by many to be inevitable.
People who refuse to believe that the Central Banks of the World would
be willing to trust part or most of their gold to the keeping of such a
Bank overlook the fact that much of the reserves of the Central Banks
has since the War been increasingly kept in foreign centres as earmarked
gold or as what the Germans call devisee : foreign credits easily
liquidated.
The Bank for International Settlements might be a great and
promising experiment, but like all innovations it encounters opposition.
There are people who think that the Bank has enough to do as Trustee
for the Reparation payments, that any ambitious enterprise tacked on to
that will endanger the Bank's success, and they are strenuously opposed
to it being made the field for experiments by the doctrinaire advocates
of price stabilisation. Some English people see in it a threat to the
international prestige of the Bank of England: some French fear it is a
device to bring about Anglo-American financial dominance; and some
Americans regard it as a consolidation of European interests to oppose
American financial power. More serious, because more potent, are the
suspicions of the Central Banks themselves. Just as the commercial banks
of any country usually instinctively oppose the establishment of a
Central Bank, so the Central Banks may dislike this Super Bank, fearing
its encroachment on their preserves. It is for this reason that the
Organisation Committee have curtailed the proposed powers of the Bank by
inserting the veto clause which forbids any financial operation by the
Bank in any market or any currency unless the Central Bank directly
concerned assents, though this does not apply to the withdrawal of funds
from any market if no objection has been raised to the introduction of
such funds. It is for the same reason also that the new Bank is not to
be allowed to issue bank notes, to accept bills of exchange, or to lend
to Governments.
Obviously, the success of the Bank will depend very largely on
its management. A board of 25 directors representing seven or more
nationalities and not all familiar with each other's language does not
sound too promising, and will throw much of the responsibility on the
President who is to be elected by the Board for three years and can be
re-appointed. It is rumoured--I do not know that this is right but I am
passing it on to you--that the first president is to be an American, and
the name of a Chicago banker is mentioned--somebody accustomed to being
shot at, I suppose--(Laughter) and that the first general manager is to
be a Frenchman. The chief danger is that the Bank may try to do too
much too soon, but there is no reason to suppose this danger is not
realized.
Summarising, the essential reparation functions of the Bank are
such as to form a solid reason for its existence; beyond that, if the
Central Banks of the World keep deposits with the Bank, it can act as a
clearing house for international indebtedness, helping to stabilise the
foreign exchanges and going far to eliminate the costs and risks now
incurred in the shipping and reshipping of gold. Beyond that again, the
Bank may in time provide a cure for the one great fault of the gold
standard: that gold does not maintain a stable purchasing power. And
away beyond all that, let us hope a time may come when we shall be
willing to trust to the integrity and skill of the World's best brains
rather than to that somewhat mythical thing, the intrinsic value of
bullion.
I have said that the one great fault of the gold standard is that
gold does not maintain a stable purchasing power. This is only another
way of saying that the general level of prices does not remain steady,
that, for example, in 1920 the American dollar could only buy you a
little more than a quarter of what it would have bought you in 1896.
Now, I have not time to argue out the case that fluctuations in the
general price level are an evil. Sir Josiah Stamp has gone so far as to
say they are the greatest social evil of our time. They are an evil, a
very serious evil, and the World, by tying its monetary units to the
value of gold has, while gaining many not-to-be-despised advantages, let
itself in for the evil of a fluctuating price level.
For, as we advance in knowledge and power, the output of wealth,
of consumable commodities, is ever increasing year by year. Unless our
output of money keeps pace with this enormous increase of trade, there
is at once a tendency to falling prices. A larger quantity of goods can
only be exchanged for the same amount of money as before, if the goods
are priced at a lower figure. When, therefore, during the Nineteenth
century, there was a stupendous increase in the volume of World trade,
there would have been a very great and very detrimental fall in the
price level but for the fact that there were a few fortunate gold
discoveries and, more important still, people invented acceptable
substitutes for gold: bank notes at first and, later, cheques. And in so
far as this volume of purchasing power is not backed 100% by gold, we
call it credit. But there are limits to which this credit expansion can
go: limits which are really psychological in nature. So long as people
accept fiduciary money on the understanding that it can be turned into
gold on demand, so much gold must be kept by all credit-issuing
authorities that the amount will be fully adequate to meet the demands
of all who are likely to demand it. It is obvious that these demands
will vary from time to time and from place to place, and when at any
time and place an increase has not been fully anticipated and
arrangements have not been made to meet it completely, a financial panic
results.
Now, if every Bank keeps enough gold to meet all probable demands
at all times, it is keeping more than it needs at all times except the
worst emergencies. It could afford to keep very much less if emergency
supplies could be easily obtained, and hence the fundamental advantage
for any country of centralising gold reserves, rendering them mobile,
and able to be utilised whenever there is a special call upon them.
Centralisation of reserves, of course, is of no help if all banks
equally and at the same time demand assistance, but this seldom or never
happens. The strain starts somewhere and by support given there at
once, the danger to the rest is averted. It was found that, when the
Federal Reserve System had centralised the gold of the United States,
the amount of gold required as a reserve against liabilities could be
with safety very considerably reduced; the gold was economised. That is
the point I want to make
that the centralisation of gold reserves reduces the amount of
gold that is necessary, considering the psychological factors, to
support a given amount of credit.
Now, let us look at the future. So far as we can see, man will
continue his wonderful progress in the development of natural resources,
more and more goods will be turned out for the market year by year.
Unless we can increase the volume of purchasing power proportionately,
prices will fall and fall, with all the handicap to business activity
which falling prices inevitably bring. And this set-back to trade with
its attendant unemployment and distress is largely unnecessary. It would
not happen if prices kept up. Prices can be kept up if the purchasing
power is increased, but how can this be done if new gold mines are not
conveniently discovered just at the right time and to the right amount?
It cannot be done by an extension of credit, since credit, generally
speaking, has already been extended as far as the existing basis
permits. Nor can it be done by the use of any further substitutes for
gold which, even if one could think of any, would only imply extension
of credit. The only solution seems to be to economise the gold we have;
in the first place by withdrawing it from domestic circulation where it
is not needed, and this has already been done in most countries; in the
second place, by centralising it all, not merely in the central reserves
of each country, but in one great central fund for the World. If that
were done--and this new Bank makes it at least possible to attempt--we
could avoid to a large extent that period of falling prices which
otherwise is going to be an unnecessary handicap to business enterprise
and to the progress of material welfare throughout the World.
This, putting it as briefly as possible, is how things would
work. Suppose the output of goods in any country--say, Canada, if you
like--increases greatly. To prevent prices falling, credit is extended.
Under present conditions, this would lead to a drain on Canadian gold
reserves unless other countries also maintained their own proper price
levels. The assumption is that, if we develop the co-operation of
central banking authorities, they will all aim at keeping their price
levels steady. In so far as mistakes are made and price levels get out
of gear, a country can be helped out by the new Bank. Instead of
allowing Canadian dollars going to a discount, the Bank will lend its
credit and provide foreign exchange at the stable parity rate. But the
Bank cannot lend its credit like this unconditionally and permanently.
The assumption behind the loan is that as soon as, or even before, it
became necessary for any country to borrow from the Bank, that country
will take, or will have taken, the necessary steps to correct what went
wrong. If they had extended credit too far so that their price level,
instead of remaining steady, had got out of gear with the price levels
of other countries, they would have to restrict credit until the
equilibrium was restored and their indebtedness to the Bank paid off.
The only theoretical difficulty is what would happen if a country, which
had been borrowing from the Bank, refuses to take the necessary steps.
What powers of compulsion can the new Bank have? And the answer is, so
far as I can see, that it has none, but that it would cut its loss and
boycott the country. The advantage, however, of belonging to the World
system of credit control would be so great that no country would
willingly face expulsion, and hence no powers of compulsion are
necessary.
For myself, I can only repeat that I regard the Bank as a great
and promising experiment. I trust that it will not be stillborn through a
blind American abstention. A year ago the Governor of the Federal
Reserve Board stated that he had become convinced that participation in
World affairs was a matter of enlightened self-interest for the United
States, and he is right. I trust that the Bank will not be crippled by
national suspicions or professional jealousies, and I hope that, as it
proves its worth and its reliability, its powers may be so extended as
to enable it to fulfill completely the wonderful possibilities of
service to mankind that are already discernible. (Loud Applause.)
President Eayrs thanked the speaker for his exceedingly lucid exposition of what to many was an involved and intricate subject.