If Foreign Exchanges Were Freed

January 9, 1950

Even those responsible for the devaluation of some 30 currencies since September admit that the results have been disappointing.

Devaluation was, in fact, the wrong remedy. What was called for was not continued exchange control with lower fiat rates, but the restoration of free exchanges. This is a necessary transitional step to eventual return to a full international gold standard. Gold means real stability based on freedom. Exchange control means a fictitious stability based on coercion.

Exchange control subordinates the citizen to the bureaucrat. Free exchange rates subordinate the bureaucrat to the citizen. Under controls the bureaucrat imposes a fiat rate by telling the citizens: “You must buy and sell sterling (or dollars) at this rate or else.” With free rates the bureaucrat is compelled to woo the confidence of the citizen. He must follow policies that will make the citizens of his own and other countries place a high value on the currency and real faith in its stability. Hence freedom promotes fiscal and monetary reform, while exchange control conceals the necessity for it.

Sir Stafford Cripps must bear the chief blame for the fateful decision to devalue, and for the chain reaction that it touched off elsewhere. But responsibility must be shared also by the International Monetary Fund.

The last annual report of the fund was available to Cripps two months before he announced devaluation on Sept. 18. If the report had recommended free exchange rates he would have been forced to give the recommendation great weight. But it never did. It did strongly hint at the need of “an exchange rate adjustment” for “countries with dollar payments difficulties.” It was this hint that Cripps followed.

The fund report wavers between a philosophy of freedom and a philosophy of statism. It deplores, in the abstract, “restrictions and discrimination” and “multiple rates.” It dreads the prospect of world trade “conducted with inconvertible currencies on the basis of bilateral bargains.” But when the fund faces a specific decision, it usually throws its weight on the side of control. Never once has it unequivocally come out for the abandonment of exchange control. It prefers fiat rates to free rates.

When Peru in November adopted a free rate for its currency, and took one of the most promising steps away from exchange control that has been taken by any nation since the war, the fund gave the action a very cool approval. And the November review of Barclay’s Bank of London explains that “to allow sterling to go free would have been against the letter and the spirit of the Bretton Woods agreement”—under which the fund was established.

In the same report in which the fund deplores “restrictions” we find it urging its member nations to place still further restrictions on private transactions in gold—either at “premium prices” or for “illegitimate purposes, particularly hoarding.” Today nearly every government in the world is inflating and debasing its currency unit, cheating its own citizens of their savings. The fund gives its apparent blessing to this process: “Changes in exchange rates can, and under appropriate conditions should, be an instrument of economic policy.” The real villain, it seems, is not the government that prints and depreciates paper money, but the citizen who tries to protect himself against this depreciation by putting part of his savings in gold.

Yet the fund, in the face of its own record, seems genuinely surprised that the world has not been moving toward freedom. “No member of the fund,” it finds, “which originally availed itself of the provisions permitting exchange restrictions in the transitional period, has subsequently felt itself able to renounce the rights provided.” On the contrary: “In a number of countries, new exchange restrictions have been imposed or existing restrictions expanded.”