Suppressing Free Markets

October 11, 1948

At a few points the annual report of the International Monetary Fund touches reality. It declares that “the European countries must themselves place their economies on a self-sustaining basis.” It recognizes that government economic controls have at least “in certain instances . . . hampered production and weakened the incentive to work.” It points out that in most countries today “the most important consideration is the termination . . . of domestic inflation.” It concedes, finally, that in at least some—unspecified—countries “an adjustment of the exchange rate may sooner or later be necessary.”

But in spite of these assertions, the main argument of the 124-page report is thrown heavily on the side of retaining overvalued exchange rates, keeping exchange controls, prolonging all the internal controls that this necessitates, and even “temporarily” tightening and extending such controls. In brief, the report on net balance supports not the philosophy of freedom but the philosophy of collectivist planning. Its recommendations, which in the main contradict those just mentioned, would not hasten world recovery but retard or prevent it. They would drain the American economy farther in an effort to support the insupportable.

The chief reason for the chronic European trade deficits that we are trying desperately to make up by ECA grants is precisely the overvaluation of European currencies through exchange control. But though the Fund’s report admits that exchange-rate “adjustments” may be necessary “sooner or later,” it proceeds to offer all sorts of excuses for not making them now.

These excuses are often inconsistent. Thus on page 2 we are told that “by the end of 1947 nearly all the European countries had reached or exceeded their prewar outputs.” But on page 8 we learn that “the capacity of these countries to export has been severely reduced.” On page 23 we are told that “so long as an exchange rate does not hamper a country’s exports, there is little to be said in present world conditions for altering it.” Yet an excessive exchange rate must necessarily hamper a country’s exports by overpricing its goods in foreign markets.

The Fund’s standard ignores, moreover, the effect of an excessive exchange rate in unduly encouraging imports. Yet this consequence gets a sort of backdoor recognition on page 28, when the Fund declares: “Until the abnormal demand for imports can be checked by other means, some countries may have to use penalty rates of exchange for this purpose.” In other words, in order to defend an excessive exchange rate for exports, the Fund is forced to recommend a different exchange rate for imports. Yet it elsewhere professes to deplore precisely such “multiple currency practices.”

The Fund is alarmed by what it calls “premium prices” on gold. It wants an even more complete government suppression of private transactions in gold. Yet the real offense of gold “premium prices” is that they expose the fraudulence of existing official paper-money valuations.

The fact is that its basic premises drive the Fund to advocate not free enterprise but an international system of collectivist and coercive state “planning” as the only way to world recovery. On page 25 it declares flatly that “the fundamental conditions which would make possible the abandonment of trade and exchange restrictions are . . . entirely absent today in most of the world.”

The Fund complains about the inconvertibility of currencies, which has finally made it all but impossible for European countries to trade even with each other. But it never seems to occur to the authors of the report that inconvertibility is merely the inevitable consequences of preventing currencies from being bought and sold at their free-market rates. In a free market any currency could be converted at any amount into any other. In fact, it never occurs to the authors that the suppression of free markets—in currencies, exports, imports, investment, domestic prices, and domestic trade—is the main cause of the present world economic crisis.