France at the Crossroads

February 9, 1948

On Jan, 25, the French Government slashed the official value of the franc from 119 to the dollar to 214. At least the same time it also permitted the establishment of a free market in the franc in terms of the American dollar.

This step brought consternation to British Government circles and to the International Monetary Fund. For it will expose not only the weakness of the pound, but the unworkability of the whole system of world exchange control that the fund was set up to maintain.

The fund declared that it did not object to the devaluation of the franc to a more “realistic” rate, but that it did object to “a discriminatory multiple currency practice.” It admitted, however, that it had “serious reservations regarding a system involving fluctuating rates.” This was equivalent to saying that it doesn’t like a free market.

The fund is based on a false concept of what constitutes “stability.” The only real stability for exchange rates is one that rests on confidence. This was provided by the old world gold standard. When each currency unit was convertible into a fixed quantity of gold, the value of each currency unit could be expressed as a fixed ratio of every other. When the world gold standard was abandoned, nothing was left but pieces of engraved paper within each country, which necessarily bore an uncertain and constantly fluctuating relationship to the value of the other pieces of paper. The fund was set up to maintain the colossal fiction that each currency is worth, in terms of other currencies, what the government that prints it says it is worth. Instead of real stability resting on confidence, the fund and its members have tried to substitute the fiction of stability resting on coercion. The governments fix the values of their currencies by fiat: and then call out the police to put anybody in jail who dares to express through his purchases and sales a different opinion.

Of course mere paper currencies, constantly fluctuating in the market, are far from an ideal system of foreign exchange. But a free fluctuating market is at least incomparably better than the mere fiction of stability maintained by the police power. A free market adjusts supply and demand. It daily tells the world what different currencies are really worth. It would end the so-called dollar scarcity. It would end inconvertibility, and with it the present hocus-pocus about “hard” currency areas and “soft” currency areas. It would restore the balance of imports and exports. It would restore multilateral world trade. The British could get dollars by selling to France or China, for example, just as easily as by selling direct to us. And only free markets could guide governments in finding the level on which they could finally stabilize their currencies on a solid gold basis.

British officials are dismayed by the French action because it exposes the pretenses of the pound. The pound isn’t worth $4. This is the bitter truth that the British Government has so far refused to face. The present fictitious value for the pound is not merely exposed but imperiled by the French free market.

How will the British be able, without French help, to prevent Americans from buying francs, say, at 340 to the dollar, and then exchanging the francs at the new official rate of 864 to the pound, thus buying pounds for the equivalent of $2.54?

America ought to be the last country to want to continue the present system of exchange control and overvalued currencies. It is we who have been asked to foot the bill. It is we who are financing—and are asked to continue to finance under the Marshall Plan—the chronic deficit in European trade which these overvalued currencies bring about.

The French action is the first major crack in the present world system of exchange control. This system is the keystone of the present controlled and dictated economies. France will soon find that it must either retreat to strict exchange control and economic totalitarianism, or push on farther toward a free economy. Its decision may be crucial for the world.