The Fund vs. World Recovery

September 8, 1947

The greatest single barrier to world recovery (if we exclude for the moment Russia and Communism) is hardly being discussed at all. This is the use of government police power to keep the price of currencies far above their real market value. It is failure to recognize the consequence of this policy that has made the whole discussion of the Marshall Plan, and of Great Britain’s trade and dollar difficulties, so unreal.

Suppose, for example, that a French brandy sells in Paris for 1,200 francs a bottle. The black-market rate for the franc is about 280 to the dollar. Let us assume that in a free market it would be about 240 to the dollar. At such a rate the brandy could be bought for $5 a bottle in American money. But the official rate for the French franc, which the American importer is now forced to pay, is about 120 to the dollar. This means that the brandy must cost him $10 a bottle. The arbitrary exchange rate raises the price as much as would a 100 percent import duty (on top of the duty that we actually impose). And this applies to every French import to this country.

Is it surprising, apart from any other factor, that France is exporting so relatively little to us?

In the same way, if we look at the problem from the other side, a typewriter that costs $100 in the United States would cost a French buyer, if he had to pay 240 francs for the dollar, 24,000 francs. But as he is able, thanks to exchange control and American loans, to get the dollar for only 120 francs, the typewriter costs him only 12,000 francs. And this applies to every American import to France. Is it surprising that Frenchmen would want to buy a great deal from us?

Yet nearly every currency in the world (with a few exceptions like the Swiss franc) is overvalued in terms of the dollar. It is precisely this overvaluation which brings about the so-called dollar scarcity. For it not only encourages other countries to increase their buying from us at the same time as it discourages our buying from them, but it leads to a demand for the dollar as a direct investment because it can be bought at bargain prices. This is the situation which the British encountered when they made the pound for a short time freely convertible into dollars. Nearly everybody who had the right to get dollars asked for them—not necessarily because he wanted American goods instead of British goods, but because pounds were worth less and dollars more than the official rate of exchange between them.

This situation would long ago have corrected itself if it had been left free to do so. When Europe’s imports exceeded its exports, the demand for dollars would have raised the price of dollars in European currencies. This would have made American goods more expensive for European buyers at the same time as it made European goods cheaper for Americans. The balance of trade would have been automatically restored.

Moreover, if importers and exporters were free to buy and sell exchange at the rates that supply and demand warranted, all currencies would be freely convertible at a price. Britain, for example, could convert its “soft” into “hard” currencies at will at prevailing market rates. It is only because people are not allowed to pay or ask the real market rates that the conversion does not take place.

Why is this simple solution to the dollar and foreign-trade problem not adopted? Because under the Bretton Woods agreements (Article IV, Sections 3 and 4) each member of the International Monetary Fund is not merely permitted but compelled to forbid currency transactions within its own borders at other than the official rates. There can be no solution of the world unbalance of trade and of the so-called “world dollar famine” until this provision is revised to permit the restoration of free world markets in foreign exchange, Not until such free world markets exist can we tell what the real “needs” of Europe are. We might find, indeed, that the restoration of free markets in exchange, especially if combined with the restoration of free markets in commodities, would make the whole “Marshall Plan” unnecessary.