MEMORANDUM ON POST-WAR CURRENCY RECONSTRUCTION

I. THE NEED FOR RECONSTRUCTION

1. The existing currency system is based primarily upon the Regulations issued under the Currency Emergency Act, B.E. 2484. Of the Currency Act, B.E. 2471 (and subsequent Amendment Acts) only the subsidiary provisions remain in force. The Emergency Act is however due to expire upon termination of the war in which Thailand is engaged; and, upon its expiry, all the provisions of the Currency Act will again come into force.

The currency system embodies in the Currency Act incorporates the principle of basing the value of the baht upon sterling at the rate of baht 11 per pound. For the maintenance of this rate, the Currency Authority is placed under the legal obligation to buy and sell sterling on demand; the rates being baht 10.80 and baht 11.20 respectively.

The present currency position makes it apparent that operation of the Currency Act will not be possible after the war; and the stability in the value (or purchasing power) of the baht cannot be secured, unless certain measures were undertaken. The next three paragraphs will supply the reasons in brief.

2. The need to finance Japanese military expenses and Governments war-time expenditure have already produced an inflated monetary position. The note circulation has jumped from baht 297,344,079 in December 2484 to baht 1,009,120,348 in September 2487, an increase of 239%. But for the operation of the Credit Control Act, the rise in banks loans and advances might also have been much more substantial. A continuous increase in the circulating media (i.e. currency and bank credit), without a corresponding increase in goods and services to purchase, can only result in a continuous increase in the internal price level; or, in other words, a non-stop fall in the internal purchasing power of the baht.

3. The natural rate of exchange between two currencies always tends to be equivalent to the ratio between their respective purchasing power in their home country. Available price indices show that the ratio of the purchasing power of the baht in Thailand and the purchasing power of sterling in England to-day differs substantially from that obtaining in 2484, the baht having depreciated to a far greater degree than the pound. Consequently the natural rate of exchange between the baht and the pound does not approximate to baht 11 to the pound. Maintenance of the value of the baht at the former level of baht 11 to the pound will not, therefore, be feasible.

Furthermore, although exchange will always move towards the natural rate, there will at all times be fluctuations above or below that rate. It is to smooth out these fluctuations that a reserve is maintained. Even upon the supposition that the natural rate were to approximate to baht 11 to the pound, reference to the existing currency reserve will show that it is not likely to be adequate for the purpose of smoothing out fluctuations and maintaining the baht always at that rate.

4. Inability to maintain the external value of the baht at the level fixed by the the Currency Act, i.e. baht 11—£1, provides the chief reason whereby the Act cannot be operated after the war. But this is not all. The internal purchasing power of the baht is continuously depreciating. Unless such depreciation can be halted, stability in its external purchasing power cannot be maintained; for, as already stated, the rate of exchange between two currencies approximates to the ratio between their respective internal purchasing power. To secure currency stability, both internal and external, reconstruction is an absolute necessity.

II. THE OBJECTIVE OF RECONSTRUCTION

5. It goes without saying that what is required of the monetary unit (i.e. the baht) is stability in its purchasing power both internal and external. Without such stability, not only trade and business but government of the country itself will meet with difficulties. Hence the objective of all monetary (i.e. currency and credit) systems is stability of the monetary unit.

6. This Memorandum will deal with reconstruction of the currency system, in so far as it is possible to do so at the present stage. Its purpose will be to suggest the principal measures that should be considered in order to secure a sound currency system; that is to say, a system which ensures stability in the external and internal purchasing power of the baht.

III. THE FUNDAMENTAL BASES OF RECONSTRUCTION

7. It cannot be too emphatically stated that the fundamental bases of reconstruction are : —

(1) the maintenance of budgetary equilibrium ; and

(2) the establishment of sound currency principles in order to achieve monetary stability

8. The above two bases are interdependent and inseparable. So long as Government expenditure is met by an increase in the means of payment, e.g. by the issue of notes, it will be impossible to prevent continuous depreciation in the internal purchasing power of the baht and its resultant economic disturbances, including continuous depreciation in its external purchasing power as expressed by the rate of exchange. So long as the budget is not balanced, Government will be forced into inflationary measures. So long as inflation is practiced, a stable currency is impossible; for, where the quantity of goods and services does not increase in proportion to the increase in the volume of money, goods and services can only be acquired for an increasing amount of money. On the other hand, if the currency is not stabilised, budgetary equilibrium will be constantly upset by rises in the level of expenditure and, particularly, in expenditure abroad. Thus the two factors, i.e. budgetary equilibrium and stable money must march together; and neither one can be maintained without the other.

9. The two factors which form the fundamental bases of reconstruction have been stated. Measures which might be considered under each head will now be dealt with. These measures necessarily concern politics. Nevertheless politics will not be taken into account in this Memorandum, which deals purely with the technical aspect of the question.

IV. MEASURES FOR RECONSTRUCTION

(A) Budgetary Equilibrium

10. The measures to secure budgetary equilibrium may conveniently be divided under three heads, viz.,

(a) Expenditure,

(b) Revenue,

(c) Financial Administration.

11. Expenditure. Since 2480 deficits have followed one another in dismal succession. It is therefore necessary to reduce the present scale of expenditure as soon as possible. This reduction is the more necessary in view of prospective extra expenditure upon (a) service of medium-term debt recently incurred, (b) renovation of existing assets, e.g. the railways and (c) other new obligations.

12. It is not possible, without detail enquiry, to recommend the steps that might be taken to reduce expenditure. It is therefore suggested that enquiry be commenced as soon as possible, since there appears to be scope for some reduction even before the termination of the war.

13. Revenue. The existing fiscal system relies to a very large extent upon indirect taxation, with the probable result that a large part of the population pay little or no tax. Furthermore, this reliance makes the system inelastic; extra revenue not being easily procurable in time of need, nor can equitable remission of taxation be easily effected in time of plenty.

The existing direct taxes fall heavily and with a sure hand upon people with fixed incomes, i.e. the earning and investing classes. On the other hand, the business class not only escapes more lightly but has more scope for evasion. This is all the more regrettable in an inflationary condition when the person with a fixed income is the sufferer.

14. The foregoing observations make it appear desirable to reconstruct the fiscal system with the following objectives : —

(a) to secure a more equitable distribution of the tax burden;

(b) to secure a more elastic system, whereby extra revenue will be more easily procurable, if needed;

(c) to prevent evasion of tax.

It will not be out of place to commence study of the subject before the end of the war.

15. Financial Administration. There can be no doubt that the principle of the the “unity of the budget” should at once be restored. Another safeguard is publicity, which should be introduced as soon as possible after the war. To these ends the following suggestions are offered:

(a) All expenditure for the year should be included in the original Estimates; and additional expenditure not so included should not be permitted save in very special circumstances. If during the year further expenditure becomes necessary, suitable steps should be taken at once to obtain a Supplementary Estimate, on which occasion either fresh revenue should be simultaneously provided or savings indicated from which the new expenditure is to be met.

(b) A statement should be published at intervals of not more than a month during the financial year, showing under the same heads as the budget the progress of current revenue and expenditure, as compared with corresponding figures for the previous year and with the estimate for the current year. (Incidentally, the revenue budget should show the nature of the revenue and not the name of the Departments that happen to collect revenue).

(B) Currency Stability

16. Little information is available with respect to the Monetary Conference at Brettonwoods. But construction of a sound currency system is simply putting ones house in order. Whatever international Conventions or Agreements there may be, certain fundamental steps will have to be taken by ourselves.

17. The measures to secure stability in the purchasing power of the currency consist of : —

(a) Determination of the standard of value;

(b) Determination of the ratio of the baht to the standard of value;

(c) Determination of the system for controlling the note issue;

(d) Provision of a reserve for stabilization purposes;

(e) Temporary control of exchange transactions;

(f) Determination of the system for controlling credit.

18. The Standard of Value. To secure stability in the external purchasing power of the baht, it is obvious that the value of the baht must be linked to the currency of that country with which Thailand has the largest trade; provided of course that such foreign currency is itself stable. Time will tell whether the standard should be Sterling or some other foreign currency or an international currency, if any. (For the sake of clarity, it will be assumed henceforward that sterling will be adopted).

19. Ratio of the Baht to Sterling. On the assumption that the baht is to be linked to sterling, the next problems are as follows;

a) At what level should the rate of exchange be fixed? This rate must approximate to the “natural” rate of exchange between the two currencies. As already stated, the natural rate is the ratio between their respective purchasing power in their home country. Consequently, the problem is how to discover this ratio, it being remembered that price indices can only form a rough guide.

b) Should some degree of deflation be effected? In a period of inflation, wages, rents and interest always lag behind prices. This is illustrated by present day conditions. With deflation, there will be similar time-lag; that is to say, prices will fall more quickly than wages, etc. It may be desirable to effect speedy adjustment of prices to wages, etc. by means of a deflation, i.e. contraction of the monetary circulation. If contraction were enforced, the internal purchasing power of the baht will rise. The natural rate of exchange between the baht and sterling will also appreciate. The level at which the rate of exchange can be fixed will be higher than if there had been no deflation.

c) If deflation is to be effected, how is the monetary contraction to be effected? There appear to be several methods which will need consideration.

20. Controlling the Note Issue. The issue of notes must be controlled, the object being to prevent possibility of inflation and to secure convertibility and elasticity. The currency must be convertible into sterling ; and the volume of circulation must expand or contract in step with the supply of goods and services, if stability is to be secured. There are two systems of control, viz:

(a) The “fixed fiduciary system” under which the Central Bank is authorized to issue notes against securities to an amount fixed by law. Any additional notes over and above this limit must be covered by gold (or the foreign currency to which the local currency is linked). This is the British system.

(b) The “proportional reserve” system, under which the notes in circulation are secured by a minimum percentage of gold (or the foreign currency to which the local currency is linked) and the remainder by securities. This system is exemplified by the U.S.A.

A choice will have to be made between the two systems.

21. Provision of a Reserve. As the baht is to be convertible into sterling, one part of the reserve must be in sterling. It may well be that a temporary sterling credit will be needed. The problem will be to determine the composition of the reserve and the proportion of each of the different components.

22. Exchange Control. Exchange control already in force will have to be continued for a certain period for the purpose of (a) acquiring certain foreign currencies, and (b) regulating and, if necessary, rationing the use of certain foreign currencies in order to ensure exchange stability. Control will moreover be a useful instrument for determining the ratio of the baht to sterling. It may be dispensed with when normal conditions will have been restored.

23. Controlling Credit. Credit is money no less than currency is money; and control of the one cannot be fully effective without control of the other. The technique for the control of credit in use in certain countries cannot be applied here. The problem will be to find a method which is both effective and feasible The control must naturally be exercised by the Currency Authority, i.e. the Central Bank, in order to secure co-ordination.

V. SUMMARY OF SUGGESTIONS

24. The measures necessary for currency reconstruction have been briefly discussed. They may now be summarized as follows :—

(1) Budgetary equilibrium must be secured and maintained by :—

a. reduction of expenditure;

b. reconstruction of the fiscal system with three principal objectives in view;

c. strict adherence to sound budgetary principles and publicity.

(2) Sound currency principles must be established. This involves : —

a. the choice of a standard of value;

b. determination of the ratio of the baht to the standard of value; this leads to the questions as to whether some deflation is to be effected and, if so, how;

c. the choice of a system for controlling the note issue;

d. the provision of a reserve for stabilization purposes, including determination of its composition and the proportion of the different components;

e. temporary control of exchange transactions to ensure external stability;

f. adoption of a technique to be used for the control of credit.

25. The substance of this Memorandum, summarized in paragraph 24, indicates the desirability of action upon two distinct sets of measures. The first set requires co-operation from the competent authorities of the Government; and the second is for the Government itself first to decide whether it should accept the principle of the recommendation.

It is suggested that effective action upon the first set of measures should be sought by the appointment of three separate Committees to consider and report upon the following questions respectively : —

No. 1 Committee; for reduction of expenditure;

No. 2 Committee; for re-construction of the fiscal system;

No. 3 Committee; for consideration of the principles which are to form a basis of the currency.

The second set of measures, decision upon which must first come from the Government itself, is summarized in paragraph 24 (1) c., that is to say, strict adherence to sound budgetary rules and publicity. Acceptance of these principles, which are already in force in democratic countries, will contribute towards regularity in public expenditure and prevention of waste through unauthorized or uneconomical spending, since publicity is in itself a safeguard against irregularities and waste. Furthermore it is suggested that, once these principles have been accepted, there should be no change through a change of Government. The best means of safegwarding avainst such a change is to embody those principles in statutory form.

Bank of Thailand,

26th October 2487 (1914)

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