Tragedy of the Franc

August 26, 1957

The new camouflaged devaluation of the French franc is not only one more humiliating economic experience for France itself, it is one more dramatic exposure of the bankruptcy of the whole postwar international currency scheme imposed on the world mainly by the late Lord Keynes and Harry Dexter White. This includes the cavalier rejection of the international gold standard as a “barbarous relic,” and the substitution of a built-in system of exchange control with a paper-currency unit pegged by each government at an artificial, arbitrary, and unreal valuation supported by police penalties, import quotas, import licenses, and import taxes, bilateral trade agreements, export subsidies, the International Monetary Fund, the European Payments Union, and similar futile substitutes for sound internal policies.

For a full century before 1914 the French franc, in terms of gold, sold without change at a rate about 145 times as high as it is today. In terms of living costs the situation is as if, in the U.S., a dollar today were to buy half as much as a cent did in 1914. Yet the tragedy of the French franc does not stand out in the world today as some glaring exception. It is, on the contrary, typical of what has been happening to nearly every currency in the world since the outbreak of the second world war.

WORLDWIDE INFLATION

In Newsweek a few weeks ago (July 1), I printed a table showing the percentage decline in the purchasing power of 56 different currencies between January 1948 and December of last year. The median decline of these 56 currencies in this nine-year period was 33 percent. The French franc, it is true, then showed a fall of 52 percent. But thirteen currencies had fallen more. The currencies of Chile, Paraguay, Bolivia, and Korea declined from 93 to 99 percent; the British pound sterling 34 percent, and the American dollar, the supposed world’s currency anchor, 15 percent. Each country has a theory that its own inflation is of some “new type” due to some malicious influence outside of its own control. But in each case the real cause is that the country has printed too much paper money.

When, in September of 1949, some 30 countries, following the example of the British pound sterling, devalued their currencies, reassuring statements were made nearly everywhere that thanks to this great major operation the cancer had been removed; the devalued currencies were now all at “realistic” levels, the balance of trade would once more be restored, and currency units would be permanently stabilized. It was forgotten that if the old practices continued, the process leading to further devaluation would simply start all over again.

BUREAUCRATIC CHAOS

There is, unfortunately, no reason to suppose that the franc is any more likely to remain stable at its new level than it did at its 1949 level. For though some temporary reforms have been put into effect—an increase in the discount rate, a restriction of credit, a cut in government expenditures, an increase in taxes—France has retained the old system of arbitrary exchange controls, with a mere change and simplification of details. Instead of allowing the franc to be freely bought and sold at whatever prices buyers and sellers can agree upon—which would lead to an automatic restoration of the balance of trade—France continues to fix the franc at an arbitrary “official” level, and to try to balance trade artificially by offering a 20 percent subsidy on most exports and imposing a 20 percent tax on imports (except fuels and raw materials “vital” to French industry). Meanwhile, the French economy remains honeycombed with protections, subsidies, vast welfare programs, and rent, price, and wage controls.

The Keynes-White International Monetary Fund system, with its national paper moneys traded at government-pegged prices enforced by police power and a crazy quilt of bureaucratic controls, has led only to continuous inflation, trade disruption, and monetary chaos. There is no substitute for sound internal policies in each country. The only real cure for the present world inflation would be a return to the full international gold standard and the disciplines and restraints which maintain that standard.