2. The Two Monetary Markets

The dealers in currencies or gold are looked upon as delinquents. All the transactions permitted with a foreign country and their settlement are made ac cording to an arbitrary rate, fixed by the Bureau of Foreign Exchange, and have remained unchanged for the last two years. As, long as this situation prevails, all the efforts made within the country to stabilize money will be of no avail. The reasons are clear. We know that the market in foreign currencies (and in gold) has as effect, first of all, to balance international commerce: the increase in the value of the franc, by increasing for the foreign market the price of French merchandise, causes immediately a restriction on French exports and an increase in foreign imports into France. On the other hand, every decrease in the value of the franc has the effect of increasing French ex ports. Without this mechanism 'there is no way to balance purchases and sales in foreign countries. One can fix the amount of imports (on condition that we find the necessary credits for payment) but no decree can influence the amount of exports, which depends exclusively on foreign demand.

This mechanism is well known. But there is an other which one notices more rarely: the foreign exchange market has an immediate and powerful effect on the interior money-for-merchandise mar ket. As every increase in the price of the franc has 62 THE TRIUMPH OF GOLD the effect of increasing the mass of products offered on the French market, the immediate result is a decrease in the price of the products and a decrease, consequently, of the cost of living in France. Let us go further. The fluctuations in the foreign exchange market have greater eHect' on the level o£ prices within the country than the efforts at deflation that one may attempt directly on these prices. This has happened often and there are numerous examples. A domestic deflation tending to reduce the pur chasing power, has practically no influence on prices if it is not accompanied by a considerable increase in the products offered. Thus, an increase obta.ined solely by domestic production is necessarily very slow, whereas the increase of the franc on the foreign exchange market has an almost immediate effect.

Let us add that the increase in the value of the franc on the foreign exchange market being easy to verify, this increase causes an almost immediate un loading of merchandise within the country, and contributes, through a new mechanism, to the reduc tion in the cost of living. This unloading is much longer in coming if it· results from interior deflation influenced only by the index of prices. The Belgian example, which is cited so often, far from refuting these findings, confirms them com· pletely. Evidently, the fall of the franc on the foreign exchange market would produce reverse effects. But 63 THE TRIUMPH OF GOLD in the present situation of the French currency, with the Marshall Plan merchandise being almost free and having no impact on the foreign exchange market, with the effort to balance the French budget, and with the possibility of an outside loan for stabiliza tion, everything indicates that the tendency of the foreign-exchange market will be toward an increase and not a decrease in value of the national currency.

It is a matter requiring tact on the part of the monetary authorities. The progressive liberation of the foreign exchange market is an indispensable condition of the success of our financial reform. 64 3 The New Franc (L'Opinion J January 20, 1948) A breach has finally been made in the monument of international hypocrisy so cleverly erected right after the war for the protection of paper moneys. It is to the credit of the French government to have given the first blow to this universal conspiracy to prevent monetary truth from coming to light. That the new system organized by the French monetary authorities still allows room for many uncertainties and does not resolve all the problems, no one can deny. It will require many more weeks yet to resolve all the different elements of the new organization for foreign exchange, to expand progressively the freedom enjoyed by industrialists and merchants in their transactions with foreign countries. But the 65 THE TRIUMPH OF GOLD fact to be kept in mind is that, henceforth, a mecha nism has been established which will have the two fold advantage of 1. providing an instrument of equilibrium be tween imports and exports; 2. furnishing a public barometer of the reciprocal value of currencies.