Josef Herbert Fürth: Contribution to “Discussion: A Stock-taking of Bretton Woods Objectives” (1953)

Josef Herbert Fürth’s contribution is an extracted conference discussion intervention responding to Mr. Brown’s paper. Agreeing broadly with Brown, Fürth concentrates on a problem he considers insufficiently developed: the transition from monetary convertibility to full convertibility, understood as the removal of direct trade controls as well as exchange controls. His central argument is that currency reform achieves its economic purpose only when accompanied by changes in trade and domestic production. Restoring the ability to exchange currencies is valuable, but it cannot substitute for liberalizing the transactions that generate demand for foreign exchange.

In Washington language, monetary convertibility is “a step in the right direction”; but this step would be futile if it led to complacency rather than to further progress.

The distinction is substantive rather than terminological. A country can make its currency formally convertible while tightly restricting the imports that would create demands upon its reserves. Such an arrangement preserves external balance without realizing the gains Fürth associates with international economic freedom: buying in the cheapest markets and selling in the most expensive. Controls distort the direction and composition of trade, so removing them must alter those patterns and redistribute activity among domestic industries.

No effective move in the direction of greater freedom could avoid hurting some sectors of trade and industry and no effective move could therefore be simple and painless.

This acknowledgment of sectoral losses gives the intervention its political-economic emphasis. Fürth does not describe liberalization as an administrative adjustment from which everyone immediately benefits. Increased aggregate production and consumption require a reshuffling of industries, with costs concentrated in particular sectors. His account of the “dollar shortage” follows the same logic. The shortage expresses a situation in which marginal expenditure on dollar goods yields greater satisfaction than expenditure on nondollar goods under prevailing production and trade patterns. Its elimination consequently requires changing those patterns until the marginal returns are equalized. The fear of a permanent shortage is, in his interpretation, fundamentally a fear that governments will find the necessary short-run adjustments politically intolerable.

The remainder of the contribution distinguishes three problems that become acute when convertibility permits trade to expand. The first concerns price-cost adjustment. Countries with inconvertible currencies may maintain external balance despite relatively high prices because trading partners accept those prices for goods that need not be purchased with gold or dollars. Convertibility removes that advantage, threatening increased imports and reduced exports. Without renewed controls, adjustment requires either lowering domestic prices and wages or devaluing the currency. Fürth treats both routes as dangerous: the former risks a deflationary spiral, the latter an inflationary one. Vigorous transitional policies are therefore necessary, although he does not specify their instruments.

The tempting alternative is to relax exchange controls while tightening trade restrictions. This would protect external balance but suppress the incentive to reorganize production and commerce—the very mechanism through which full convertibility is supposed to deliver its benefits.

It is impossible to state what degree of trade controls is exactly equal in harmfulness to a given degree of exchange controls; but progress toward monetary convertibility would certainly be too dearly bought by any substantial tightening of trade controls.

Fürth thus refuses to assess reform solely by the disappearance of exchange restrictions. Its significance depends on whether economic transactions actually become freer, rather than being constrained through a different instrument.

The second problem is “partial disequilibrium”: a country may balance its external accounts overall while running a deficit in convertible currencies and accumulating surpluses in inconvertible currencies that cannot serve its international needs. This encourages it to promote exports to convertible-currency areas and restrict imports from them. A newly convertible country therefore faces pressures arising both from its own currency composition and from its partners’ attempts to correct theirs. Fürth presents the European Payments Union as a practical response. By placing convertible and inconvertible member currencies on the same footing for intra-union transactions, it reduces incentives to extract dollars through export surpluses against convertible members.

Restoration of monetary convertibility of sterling or some major continental European currencies would thus make the EPU more rather than less useful.

Regional cooperation, on this account, remains important as convertibility advances. The EPU’s simultaneous emphasis on trade liberalization and the abolition of exchange controls exemplifies Fürth’s broader conception of reform.

The third problem is the need to finance temporary deficits: no country can maintain overall external balance continuously. Greater trade freedom increases opportunities for temporary disequilibrium, making reserve support more important. EPU credit quotas and sterling-area access to the London money market act as additional foreign-exchange reserves for fluctuations within their respective arrangements. Fürth concludes that achieving the Bretton Woods objectives requires bolder transitional domestic policies and closer international cooperation at both regional and universal levels. The contribution’s distinctive claim is that meaningful convertibility depends not merely on removing monetary restrictions, but on managing structural adjustment and providing institutions capable of supporting freer trade through its inevitable disruptions.