Abolish Exchange Control

September 5, 1949

The first need today of Britain and every other country that complains of a “dollar shortage” is the abolition of exchange control. This single step would put an end virtually overnight to the whole so-called “dollar crisis.”

Yet this crisis is being discussed today in an incredible atmosphere of unreality. The bureaucrats of the world can think of nothing but more “austerity” or more and bigger American handouts. Not a single one of them proposes to repeal the measure primarily responsible for the whole exchange nightmare—the exchange controls that they themselves have imposed in order to maintain a fictitious value for their own currencies.

The British socialists, for example, insist on maintaining at all costs the fiction that the pound sterling is worth $4.03. They have made it a crime for their own citizens to buy or sell sterling below this rate. They forbid their own consumers to buy the foreign goods (or even the British goods) they want, but only what the bureaucrats tell them they can have. They compel British manufacturers to set aside for export minimum percentages of their output. They police the “cross rates” between the pound and the dollar throughout the world. They have succeeded in persuading American bureaucrats to turn over billions of American taxpayers’ dollars to try to plug up the gap that exchange control creates. Yet the sterling crisis grows steadily worse. One triumph of semantic confusion the British bureaucrats can boast. They have succeeded in getting the world to call the pound crisis a “dollar crisis.”

Suppose the whole worldwide exchange-control mechanism were simply dismantled and the pound allowed to sell for what it would bring in free markets. It would fall, let us say, to around $3. The exporter of a British item that now sells in this market for $4 could then afford to sell it for $3. He would still get £1 for it, as before. If $4 prices the item out of the American market, $3 might price it back in again.

Or suppose that $4 were a competitive price here but that it cost the British manufacturer £1.1^* to make the item. Then at $4 to the pound he could sell this item here only at a loss of £0.1, but at $3 to the pound he would get £1.33 for it and so would make a profit of £0.23. In short, a lower price for the pound in dollars would increase not only the incentive of American consumers to buy British goods here but the incentive and ability of British producers to sell them here.

British imports, it is true, would cost more—but in pounds, not in dollars. Higher prices in pounds would cause British consumers automatically to cut down on their purchases of foreign goods. They would no longer need coercive import quotas and prohibitions to make them “conserve dollars.”

Yet instead of merely returning to the system of free exchanges that prevailed immemorially and almost universally (outside of Stalinist Russia and Hitlerite Germany) until ten years ago, the bureaucrats of the world now hotly urge still more false remedies for this crisis of their own creation.

It is fashionable even for British Conservatives and American officials to say today, for example, that what Britain is suffering from is excessive production costs and that these must be brought down for Britain to “compete.” But this disregards the prohibitive price handicap now put on British exports by the fictitious $4 pound. And it also ignores the law of comparative costs, which one used to suppose that every economist since Ricardo understood. Under free-exchange rates high British production costs would be compensated by a lower quotation for the pound. For Britain to try to adjust its whole cost and price level to its spurious exchange rate would be (to borrow a simile from Wilhelm Röpke) like shoving a grand piano over to a misplaced stool instead of adjusting the stool to the piano.

It is correct to say that British collectivism and controls are responsible for Britain’s present crisis. But the keystone of this collectivism is exchange control. And that is why exchange control is the last thing that Sir Stafford Cripps is willing to surrender.

[^* Decimal-pound amounts were shown as shillings and pence in the original.—Ed.]