Devaluation Instead of Freedom

October 31, 1949

Serious signs are appearing that sterling devaluation is not going to have the good results for which Sir Stafford Cripps had hoped. And the chief reason for this is that he will not permit free markets to function.

His first mistake was “devaluation” itself. What was called for, as Winston Churchill has hinted, was not an arbitrary slash in the “official” value of the pound but a return to free exchange rates.

Under a system of free rates, with Britons and foreigners exchanging pounds against other currencies at the relative valuations that they mutually agreed upon, the only way in which a government could sustain the value of its currency would be by taking the measures necessary to win confidence in it. But Sir Stafford preferred to have the value of the pound fixed, not by the people who trade in it, but by himself; not by confidence, but by fiat, coercion, and command.

Even this mistake would not have been irremediable if he had been willing to allow the new rate to produce its natural economic consequences. But it is precisely these consequences that he seems determined to prevent. “Nothing,” he says, “—and I mean literally nothing—should be done to increase personal incomes arising out of profits, wages, or salaries.” And again: No one must “try and profiteer or improve [his] relative position compared to [his] fellow citizens.” Sir Stafford wishes to retain what the British Socialists are fond of calling “fair shares for all.”

Now it is in fact only by the relative changes in prices, profits, and wages brought about by the new price of the pound that labor and capital could be voluntarily diverted from domestic production into export production. British manufacturers will produce more for export and less for home consumption only if they see a better prospect for profits in the foreign than in the domestic market. Manufacturers can bid labor away from domestic to export production only if they are able to offer, and permitted to offer, higher wages for export than for home production. This is precisely what a free market under the new sterling rate would enable them to do. This is how a free market works.

Sir Stafford either does not understand this or finds it abhorrent. He prefers government price fixing and government wage fixing. And like most government planners, he thinks of prices en bloc and of wages en bloc. He will not permit the thousands of necessary relative adjustments to be brought about by the free play of prices, profits, and wages in the market, with their corresponding effect on relative deterrents and incentives. Therefore he is forced to try to substitute the incomparably clumsier and less effective method of exhortations and compulsions. He forbids free-market incentives and then tries to substitute the paternalistic statist incentive of taxpayers’ guarantees against exporters’ losses.

It is open to doubt whether Sir Stafford understands even the direct market mechanics of devaluation. The only illustration he offered in his radio speech announcing devaluation assumed that a British export’s price in pounds remained fixed and that the full adjustment to the new pound rate was made by a lower price in dollars. If this were general, the British exporter’s advantage would be very slight. He would get no more pounds from a given volume of sales than before, and exporters collectively would have to sell 44 percent more goods in volume for Britain to earn the same number of dollars. But where the exporter could sell for the same dollar price as before, he could get 44 percent more pounds for the same sales volume—no negligible incentive. In practice, in free markets, the final price adjustment for most exports (or imports) would tend to be made partly through higher sterling prices and partly through lower dollar prices.

In sum, though free exchange rates would be infinitely preferable to “devaluation,” neither free exchange rates nor devaluation can bring their desired results except within the framework of free markets and a free economy.