Collapse of a System

September 2, 1957

The new devaluation of the French franc (counted by one researcher as its eleventh devaluation in 21 years) is a still further proof, if any were needed, of the weakness, instability, and bankruptcy of the paper-money exchange-control system built in by Lord Keynes and Harry Dexter White after the second world war under an International Monetary Fund. This system is a tour de force. It combines the alleged disadvantages of the international gold standard with all the real disadvantages of a floating paper-money standard, with none of the merits of the first and none of the compensations of the second.

A floating paper-money standard (as in Britain between 1931 and 1939) is, of course, inherently unstable, subject to every political pressure and bureaucratic caprice. It tends constantly toward more inflation. It is argued, however, as an “advantage,” that prices and wages in the country with a floating paper money can be kept “independent” of world prices and wages.

A floating paper-money system also has the (comparative) advantage that fluctuations of the currency in terms of other currencies do not too greatly disrupt trade between that nation and others, and do not create a “dollar gap” between its imports and exports. For when a country’s paper currency begins to depreciate, the rise of internal prices and wages is offset in the foreign-exchange market by a corresponding decline in the price of that currency in terms of other currencies. And a floating currency is always fully convertible at the market rate.

MASKING INFLATION

What happens, instead, under the present system? Within each country there is constant pressure to maintain “consumer purchasing power,” easy money, ever-rising wages, and “full employment”—in brief, inflation. So each country inflates. But there is an agreement with the International Monetary Fund to maintain the official exchange value of the inflated currency. This is done by forbidding people to buy and sell that currency except at the official rate. This official overvaluation of the currency encourages imports, discourages exports, and creates a “balance of payments” crisis. The inflating country then seeks to offset all this by a maze of import quotas, higher tariffs, export subsidies, and multiple exchange rates. The problem finally becomes insoluble, and then the bureaucrats kick the whole economy downstairs.

The result is a series of violent devaluations, such as the worldwide crisis in September 1949, and the new French crisis today. Devaluation is a drastic remedy, equivalent to cutting off a leg to save a life. Yet as France has illustrated since 1949, the remedy is at best temporary if the patient continues the same practices as in the past. Moreover, each devaluation intensifies fears of further devaluations, of that currency and of others, and so makes the maintenance of the whole system more and more precarious.

RETURN TO GOLD

The entire IMF system of exchange control of paper moneys at arbitrary rates should long ago have been abandoned. But the only official suggestion that this be done has come from Ludwig Erhard, Economics Minister of Western Germany. Other officials talk privately of another devaluation of the franc and a smaller one for the British pound. A still more astonishing proposal is that the pound sterling be left unchanged in value while the American dollar, German mark, and Swiss franc be “revalued” upward by 10 percent. Such proposals have been aptly described as prescribing surgery on the healthy to cure the sick.

The only real permanent cure is a return to the international gold standard. As Philip Cortney has put it: “It should have become obvious by now that none of the important problems (like the prevention of booms and depressions, the establishment of freely convertible currencies plus stable exchange rate, the expansion of multilateral, unhampered international trade, the union of Europe) can be solved without a return to the international gold standard. . . . The gold standard is the only protection of the politicians against extravagant expenditure requests from pressure groups of all kinds. It is the only safeguard against demagoguery and social disorder.”