The Cause of Currency Chaos

July 9, 1951

The International Monetary Fund was born in July 1944. One of its declared purposes was “to assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign-exchange restrictions.” A few weeks ago it issued its second annual report on exchange restrictions. The report concluded that “despite the existing uncertainties and difficulties . . . many countries are in a position to undertake substantial removal of discrimination and relaxation of nondiscriminatory restrictions and to make significant progress toward convertibility.”

On the surface this conclusion sounds promising. Yet the full text of the report leaves one with no good reason to believe that progress toward monetary stability and removal of restrictions will be any greater in the next seven years than it has been in the last seven.

For the report is riddled with qualifications, loopholes, and exceptions. For example: “It is the view of the Fund that, if countries have favorable balance of payments conditions and are experiencing increases in their reserves providing a reasonable basis of exchange stability it is in their interest, and in that of the international community, to relax or remove restrictions unless such action would produce conditions justifying the intensification or reintroduction of those restrictions.”

More examples: “In certain cases, strategic considerations may well require the retention of control machinery, even if it is not required for financial reasons.” “The Fund recognizes that there are a number of countries still experiencing basic or structural balance of payments difficulties limiting their ability at this time to make progress toward the removal of restrictions.” “It must be recognized, however, that some countries pursuing substantial development plans may not be in a sufficiently strong balance of payments position to permit them to dispense with the selective application of controls.”

The sad truth is that the schizophrenia of the Fund—which makes it simultaneously both for and against exchange restrictions—was built into its very conception. In accordance with the theories of the late Lord Keynes, the Fund was established on the assumption that governments can print paper money and fix the value of their monetary unit by simple fiat; and that this rate both can and should be maintained by police coercion. Section 3 of the Articles of Agreement even provides that a member government must not permit exchange transactions to take place within its territory at rates which are different from the parity level.

Other Keynesian theories embodied in the Fund Agreement are that the maintenance of a nation’s monetary unit at parity by convertibility into gold on demand is an outworn, needless, or at best a permissible window-dressing requirement; and that the bureaucrats have the right to alter the exchange value of their nation’s monetary unit overnight—thus cheating both domestic and foreign holders of its currency at any time this seems to serve their government’s advantage.

Is it any wonder that the end product of these ideas has been increasing currency chaos, an endless series of inflations, a bewildering network of exchange controls which put domestic economies in a straitjacket and disrupt or strangle international trade? The managers of the Fund urge constantly and rightly that all currencies be made freely convertible. But they also want to retain exchange control. Now exchange control and free convertibility are irreconcilable. The way to get free convertibility of currencies is simply to stop prohibiting it—to stop price-fixing in currencies, to stop policing the rates, to stop seizing, licensing, and rationing exchange. But the Fund grants the central principle of exchange control and then deplores all the corollaries.

If we want not merely convertible but stable exchange rates—. Well, some day, somewhere, somebody, even in an official position, may triumphantly rediscover the gold standard.