Set Currencies Free

September 16, 1957

When the governors of the International Monetary Fund gather in Washington on Sept. 23 for their annual meeting, they may be counted on, if past experience is any guide, to deplore the worldwide inflation that has continued ever since the fund was set up twelve years ago. They will no doubt once again recommend that nations balance their budgets, reduce barriers to international trade, move toward convertibility of their currencies, and refrain from creating multiple exchange rates. Some delegates may even suggest that nations stop printing more paper money.

But after this collective homage to the economic virtues has been duly paid, one delegate after another will explain that his own country continues to face a special situation and must continue to impose a few restrictions on convertibility, a few barriers to imports or subsidies to exports, till the “emergency” is over.

EXCHANGE CONTROL

Each year the pretense is kept up that despite “disappointments,” real “progress” has been made toward “convertibility” and “stability.” The blunt truth is that since the International Monetary Fund was established the depreciation and debasement of currencies has gone steadily on from year to year. Worldwide inflation is rampant. And it is governmental policy that permits or creates this inflation. It is the system of the International Monetary Fund itself which encourages, prolongs, and enforces exchange control. This in turn requires for its enforcement a network of internal and external controls, of artificial currency valuations, tariff barriers, import quotas and export subsidies, that regiment national economies, distort prices and production, create so-called “dollar gaps,” and unbalance and disrupt international trade.

The only ultimate cure for this is a return to the international gold standard. But the situation is too chaotic, the network of government controls is too extensive and demoralizing, and confidence has been too profoundly shaken, to permit this to be done overnight. No government knows at what gold value it could safely set and maintain its currency unit to prevent either a dangerous inflation or a dangerous deflation.

There is one indispensable first step. This is to dismantle the entire exchange control system supported by the International Monetary Fund and to let the exchanges go free. This is the step that Ludwig Erhard, West Germany’s Economics Minister, has been almost alone, among high government officials, in recommending. Let us see some of its results:

The so-called problem of convertibility would be solved. Free exchanges would automatically mean free and full interconvertibility of currencies. Tangier, to take an illuminating illustration, is a free money zone. A dispatch from Morocco to The New York Times of Aug. 31 declares: “In Tangier anyone can import anything from anywhere. . . . Since any kind of money is exchangeable into any other kind of money in Tangier’s banks at the free market—that is, uncontrolled—rate, there will be no difficulty in paying for hard-money imports.”

For similar reasons, the so-called problem of the “imbalance of foreign trade” would be solved. In the last week of August, French Finance Minister Gaillard released figures showing that, since the partial devaluation of the franc, France’s $118 million deficit with the European Payments Union had been transferred into a credit balance of $36 million. This is merely because the French franc was allowed to sell nearer to its free market value.

TO RESTORE CONFIDENCE

Free exchange rates, of course, would also solve the so-called “dollar shortage,” which is merely a result of overvalued foreign currencies.

Free exchange rates would not, it is true, solve the problem of inflation or monetary instability. But they would at least reveal such instability from day to day, instead of hiding it, as exchange control does, until the whole false front collapses. When exchange rates were free, they could be stabilized only by policies within each country calculated to restore confidence both of nationals and of foreigners in that country’s currency. Canada has shown the way. Stability begins at home. The only cure for inflation is to stop inflation.