How Europe Curbs Inflation

June 9, 1952

I have been meaning for weeks to discuss here a remarkable address, now available in pamphlet form, delivered in New York on Jan. 23 by Per Jacobsson, the economic adviser of the Bank for International Settlements at Basle (“Credit Policy: Recent European Experience”; National Industrial Conference Board; 247 Park Avenue; New York 17; 50 cents). This speech describes a gradual return toward monetary sanity in Europe that few Americans seem to be aware of.

At the end of the first world war most countries were eager to return quickly to stable currencies and to the gold standard. But after the second world war, under the influence of Lord Keynes, they preferred cheap money and deficit spending. This, they supposed, was the secret of perpetual “full employment.”

Keynes’s influence, however, was never as great on the continent of Europe as in England and America. “The continental peoples,” Per Jacobsson explains, “have been faced more immediately with the evils of inflation. They have learned to dislike controls. The imposition of controls has been very closely connected with the Nazi and Fascist regimes.” And contrary to the belief so widely held in 1945 and 1946, that between a capitalist United States and a Communist Russia there would stand a socialistic Europe, Europe has in some respects shown itself to be more “liberal in the sense in which Europeans still use this word—indicating adherence to and belief in a free economy—than either of the two principal Anglo-Saxon countries.”

Jacobsson then goes on to describe the monetary and fiscal policies followed in each of the leading European countries. Switzerland led the departure from cheap money, and the free-market quotation of the Swiss franc was for several years above the corresponding quotation of the dollar. Belgium followed sound policy and soon achieved monetary stability. It was criticized, particularly in England, for permitting unemployment; but Belgian workers supported the policy as holding down prices and helping them to achieve higher real wages.

In Italy, by 1947, prices had risen to 55 times the prewar level. But then—Einaudi, as Governor of the Banca d’Italia and Minister of the Budget, raised interest rates, imposed severe credit restrictions, and cut off all food subsidies. These seemed harsh measures-but they stopped the price rise.

“In the following year Einaudi was almost unanimously elected President of the Italian Republic.”

Following a crisis in Germany in October 1950, the discount rate of the Bank Deutscher Länder was increased from 4 percent to 6 percent. Ordinary bank accommodation could be obtained only at rates between 8 and 12 percent. “It was soon found that the program . . . adopted in Germany was working wonders. . . . The success of the German rehabilitation scheme has had a tremendous effect upon European thinking: It has shown us that a country as burdened with difficulties as Western Germany can, through a resolute credit policy, suddenly reverse its position.”

Jacobsson discusses similar changes in Holland and Austria. Since he spoke in January, policies in the same direction have been adopted in France and Britain. On March 11, for example, the Bank of England increased its discount rate from 2½ to 4 percent.

From this international postwar experience Jacobsson draws some of the principal monetary morals. One is the importance, in curbing inflation, of “a restrictive credit policy including the application of higher interest rates. . . . Of particular importance has been the withdrawal of support for the quotations of government bonds. “The first duty of the [U.S.] authorities toward the world,” he adds, “is to maintain the greatest possible stability in monetary and price conditions inside the United States.”

Yet both the President and Congress have been heedless of these lessons. Mr. Truman has been busily removing credit restrictions at the same time as he insists on continued price control. Yet with firm credit policies price control is unnecessary; and without them it is a pious fraud.