8. Exchange Rates Run Wild*

One of the most amazing things to an economist traveling nowadays in Europe is the awkward and truly grotesque conditions that have developed as a consequence of governmental interference, restrictions, and regulations in the foreign money markets. It seems as if the public and even the experts in the United States are only inadequately informed about these conditions.

To begin with, if one were to try to describe these conditions as identical with the system invented by Schacht, this would be an offense to him. For whereas Schacht’s system worked almost faultlessly, the new European systems do not work at all in essential respects. They are caricatures rather than reproductions of Schacht’s system.

This is not to be blamed on the men who introduced these systems. It is caused because governments are only able to prevent the working of the laws of supply and demand under very special conditions, such as are present when a nation is either at war or under totalitarian control. Here every move of the citizen, every letter and every telegram he writes and receives, every telephone call he makes, is subjected to strictest censorship. In democracies at peace, where the citizen remains free and independent in his essential civil rights and where his private moves are investigated only under special circumstances, the laws of supply and demand continue to work in the field of foreign exchange, if only in an imperfect way, on the black markets. In the person who expects further depreciation of the nation’s currency by abuse of governmental or pressure group power, the wish for future security is stronger than the fear of the penalties for contravening the exchange regulations, especially if they do not include the death penalty à la Göring.

The prices paid for foreign exchange or gold on the black markets represent, so to speak, the secret ballot of the citizens on the fairness of the governmentally fixed exchange rates. They show the citizens’ real opinion of the value of their currency and to what extent they believe it is overvalued by the government.

FRUSTRATED INFLATIONS

The period after World War I was featured by exceedingly strong inflations of the currency with correspondingly strong inflations of prices of goods and foreign exchange. At the beginning, it is true, the exchange rates rose substantially faster than the internal price level—giving effect to the so-called sell-out of the countries. But in the long run the quantity of money in the hands of the public, the prices of goods and services, and the prices of gold and foreign exchange moved up in conformity. There were endeavors to hold prices down through a system of price ceilings and exchange rate controls, but neither the former nor the latter worked for any length of time. The inflation ran its course. Based on the experience gained during and after that war, one was able during World War II to check to a certain degree the creation of superfluous purchasing power, especially by means of severe excess profit taxation. Nevertheless, monetary inflation has still been strong because the enormously increased number of employed have not been and perhaps could not be, taxed in such a way that the purchasing power would remain on its former level. However, if inflation was not prevented in its causes, it was prevented in its effects. A very stringent system of price and wage controls tried to prevent the increasing purchasing power from achieving its natural effect: the raising of prices and wages. What ensued was not prevention of inflation, but frustration of its consequences.

Frustrated inflations marked World War II and its postwar period in all countries—in some to a greater degree than in others. As a result all economies became divided into two distinct areas: one where prices were regulated, and the other where the governments either did not want or were not able to enforce price regulations—the area which includes the black markets. It is into this second area that purchasing power overflows when it is prevented from exhausting itself in the first area by price ceilings and/or rationing. In large countries such as the United States, where the internal markets have such overwhelming importance and ideas of capital flight are for various reasons unknown to the populations, the purchasing power overflowing from the first to the second area is directed towards the legal purchase of real estate, certain luxury articles, and securities, and towards the illegal buying of certain consumer goods on the black market.

In the much smaller countries of Europe, which are more dependent on international trade than is the United States, and in which the population is extremely exchange-rate-conscious, the excess purchasing power is directed not only towards nylon stockings and cigarettes (luxury articles whose importation is allowed only in very small quantities) but also towards the acquiring of foreign currency and bank balances. This is partly because these can again be used for the illegal purchase of illegally imported luxury articles, and partly because foreign currency and bank balances are considered means of conserving the value of one’s assets. For the domestic currency has—most outspokenly in France—lost its function as a means of conserving value, retaining only its function as a means for payment. Not so strongly as during the great inflation in Germany and Eastern Europe, but nevertheless quite distinctly, dollar bills and gold have replaced internal currency for hoarding and saving purposes.

BLACK AND GRAY FOREIGN EXCHANGE MARKETS

The traveling economist needs quite some time before he finds his way through the maze of the various official, semiofficial, and unofficial exchange rates. To the degree to which dealing on the respective markets and the fulfillment of transactions violate the regulations or laws of one or more countries or only certain conventions binding some banks, the markets are characterized by colors ranging all the way from black over gray to white. The various kinds of “money” in question, and the prices at which they are traded in the various European countries, is an extremely interesting subject, but one that could be treated only within the framework of an extensive study.

Nevertheless, a certain understanding of the conditions on the black and the gray markets can be gathered if one reviews the prices at which the various foreign exchange values are quoted in Switzerland. Switzerland itself—though free from most currency restrictions (e.g., concerning the exportation of currency)—must also be considered a country in which the government controls international payments as far as foreign trade is concerned. For where such payments are not affected by international clearings, the foreign exchange for imports has to be purchased at the official rate from the National Bank; however, where specifically Swiss foreign trade interests are not concerned, dealing in every sort of foreign money has been entirely legal from the Swiss standpoint since the end of the war. During the war dealings in foreign bank notes were forbidden in order to prevent the Germans from disposing of stolen bills in neutral Switzerland.

On the markets for bank notes, only small denominations—American bank notes of not over $20—are dealt in freely. Large denominations are salable, if at all, only at a strong discount, the reason being either that their importation into the countries of origin is forbidden, or that paying them into bank accounts is controlled for illegal (especially internal) black-market transactions. The so-called black or internal payments that are traded replace the ordinary checks on or transfer orders to foreign banks. They are sold in Switzerland by small firms that specialize in these matters because the banks of standing do not trade in these markets. The counterpart in the foreign country is not a bank, as is usual, but a private individual or a small firm that pays out the purchased amount at the residence of the recipient. In this way, a traveler who needs money for living expenses in France can acquire the francs from somebody in France who needs Swiss francs in Switzerland without a single check or letter between banks passing the frontiers.

In most countries of Europe, outside Switzerland, these transactions are clearly illegal. Swiss francs, for instance, can be acquired in France legally only for importation of specific goods by special license. The purchase in Switzerland of dollar payments from Swiss credits would be illegal from the standpoint of the United States as long as the frozen Swiss accounts are not deblocked. Some transactions in United States dollar checks and transfer orders are, however, entirely legal also from the American standpoint. These are concerned with payments from Swiss accounts that have been licensed for some reason by the United States Treasury, but in which the dollars received are not taken over by the Swiss National Bank at the official rate of frs. 4.30 to the dollar. (At this rate the National Bank buys only dollars received in payment for exports and—in limited amounts—for certain other purposes, e.g., the support of charities.) All other dollars are called “finance” dollars as distinct from “commercial” dollars. They are traded and quoted freely and the quotations are, like most prices for currencies and transfer orders, listed in newspapers and bulletins.

A QUOTATION LIST

The following are the prices at which foreign paper money was quoted in Zürich on Aug. 3, 1946. The official exchange rate is added in the last column so that the discount of the free market rate in comparison with the official rate can be seen without difficulty.

	Demand	Offer	Official Rate
Dollar	3.32	3.47	4.30
Pound Sterling	10.32½	10.42½	17.34
French francs	1.35	1.45	3.60
Belg. francs	4.80	5.00	9.90
Dutch fl.	41.50	43.00	162.00
Swedish kr.	105.00	110.00	17.40
Portuguese esc.	13.00	13.75
Czech, kr.	3.25	3.75

The following gives the quotations for the so-called “internal payments.” The official rates are again added in the last column.¹

	Internal Payment	Official Rate
Paris (100 ffr.)	1.45	3.60
Brussels (100 bfr.)	5.25	9.90
Italy (100 lire)	.80	1.91
England (1 pound)	10.50	17.34
U.S.A. (financial dollar)	3.40	4.30
Portugal (100 esc.)	13.60	17.40
Sweden (100 kr.)	102.00	102.60
Holland (100 hfl.)	42.00	162.00
Argentina (100 pes.)	84.00	106.00
Spain (100 ptas.)	14.00	39.50
Turkey (1 1 tq.).	1.35	3.30

It is clear from the above that dollar bills and financial dollars are traded at a discount of about 20 per cent.

For gold coins the following prices are paid:²

	Napoleon	Eagle	Sovereign
Switzerland (official)	30.50	7.50	38.45
Belgium	57.00	13.70	75.00
Italy.	50.00		65.00
Portugal		13.70	40.00
Turkey	50.00		63.00
Egypt			62.00

The quotations represent the prices paid for gold coins on the black markets in the various countries, calculated in Swiss francs at the black-market rates for the latter. It can immediately be seen at what a tremendous premium, in comparison with the official rate in Switzerland, gold coins are traded all over the world.³ For instance, the Napoleon—the gold 20-franc piece—is worth almost 100 per cent more on the black market in Belgium than it is officially worth in Switzerland.

The official price of gold in Switzerland is the price at which the Swiss franc is stabilized for the time being. The National Bank, however, sells gold or gold coins not to every bearer of her bills, but only—and this in very small quantities—to people who are known to her as reliable. The result of this semigold standard—where everybody can sell and not everybody can buy gold at the official rate—is the development of a black market for gold in Switzerland too. This market, known to the authorities, exists even though trading above the official prices and, even more, the exportation of gold are strictly forbidden. The black-market prices for gold and gold coins seem to be roughly 50 per cent higher than the price corresponding to the gold standard of the Swiss franc.

From all this it is obvious that on the scale of values gold ranks at the top; then follows the Swiss franc; then the United States dollar and the currencies of the dollar bloc; then the pound sterling; and finally such truly weak currencies as those of Holland, Belgium, and France.

AWKWARD CONSEQUENCES

The imagination is not equal to figuring out the awkward situations that develop from what may be euphemistically called the arbitrage between white and black exchange rates. It is not possible to describe the multitude of abnormalities one hears of the longer one stays. A single story may suffice. The fact that it has been published in a well-known Swiss magazine shows to what degree these things are publicly known. It seems that a correspondent of Time heard it in London. He met a man who traveled to Switzerland with the £75 allowed every British subject for a trip to Switzerland. He changed his pounds in Switzerland at the official rate of fr. 17.34, receiving approximately fr. 1,300. Of these he spent fr. 100 for all sorts of nice things. With the remaining 1,200 Swiss francs he bought on the black market 120,000 French francs which were delivered to him when he went to Paris. Here he spent 5,000 French francs for black-market dinners, etc. With the remaining 115,000 French francs he bought on the black market pounds at the rate of fr. 700, thus receiving about £160. This means that he returned to London, after having spent quite a lot of money for all sorts of luxuries and travel, with £85 more than he had had when he left!⁴

This was possible, of course, because the traveler was able to change his pounds into Swiss francs at the official rate, whereas all transactions that followed back to pounds were traded on the black markets, where the Swiss franc has a much higher value.

Incidentally, in United States dollars too, a profitable transaction is possible which, while not so spectacular, is legal, although not quite fair. The National Bank of Switzerland pays to the American traveler fr. 4,250 for $1,000 for living expenses in Switzerland during every calendar month. If he stays one month and one day he receives for $2,000 francs 8,500. Supposing that he spends 3,000 francs—which is ample for one month’s stay—he keeps 550 francs, for which he can buy dollar bills at the rate of 3.50, thus obtaining about $1,600. This means that he has lived a whole month in Switzerland for $400 instead of the $750 representing the counter value of the 3,000 francs he really spent. If he buys American money orders, which are traded freely in Switzerland at the price of about 3.20 (though the cashing of the money orders for Swiss accounts seems to be illegal from the American standpoint), his profit is even larger.

THE BLACK MARKET AND THE MORALS OF THE PUBLIC

The profits that black-market traders can make at the expense of the community is not the worst consequence of the existing margin between white and black exchange rates. The real damage is that it undermines more and more the respect of the public for the law. The feeling is created that the black market prices represent the true value of the foreign money and that it is the government which does an injustice to its citizens when it forces the exporters, or—in the case of the confiscation of foreign bank balances and securities—the investors to deliver their property against a compensation in internal currency that is calculated at the low official rate.

The absence of any feeling of guilt over trading on the black markets renders contraventions of the law more frequent. In fact the contraventions have become so universal that they can be prosecuted in only a very small percentage of cases. In certain countries every waiter is prepared to change foreign money at the black-market rate. The entire situation shows that the power of the government to regulate prices against the laws of supply and demand has its limits. The only reliable way to regulate prices is through controlling the quantity of spendable money by a strict financial and interest-rate policy. To those who believe that an inflation can be checked for any length of time in spite of easy taxes and easy money, an informational trip to Europe is strongly recommended.

ORGIES OF BUREAUCRACY

One can imagine how huge a bureaucratic apparatus is needed for the working of the artificial systems. For not only do the official prices have to be enforced by all sorts of police measures against the forces of supply and demand; there also has to be an organization that protects the economy against exchange rates that are “wrong” in essential respects—the official rate of foreign money being, for instance in France, too low to maintain an equilibrium in the trade balance and to prevent it from becoming too passive; the black-market prices, on the other hand, being due to the risk premium they contain—too high and disturbing the balance of trade in the opposite direction towards too big activity.

The fact is that in every European country huge organizations have been created whose only purpose is to enforce “wrong” official exchange rates and to paralyze their economic consequences—organizations which would of course be superfluous under a free currency system. Below is a survey of the respective “frustrations” introduced in various countries:

1. In countries with weak currencies, i.e., currencies with a tendency to weakness at the official rates, especially towards the Swiss franc and the United States dollar.

Regarding frustration of the official rates: As the official rates of the foreign exchange are lower than the rate at which the trade balance would be in equilibrium, thus giving it a tendency of becoming highly passive, it is necessary—

(a) To strangle imports not limited by high foreign exchange rates through all sorts of artificial practices such as import quotas, rationing of the foreign exchange for import purposes, and so on.

(b) To stimulate exports, in which there is not sufficient incentive because foreign exchange rates are too low, by all sorts of direct and indirect subsidies.

Regarding frustration of black-market prices: The very high black-market rates of course create a very strong appeal for the illegal export of all sorts of goods which the government wishes to retain in the country, because they are consumed by the masses—such as food smuggled in great quantities from Italy to Switzerland—or because they represent internationally recognized values—such as jewelry and gold that the government wishes to use for its own purposes.

It is clear that a very extensive antismuggling organization is needed for counteracting the high stimulus to illegal exports. As a matter of fact, the fights between the custom officials and smugglers at the various frontiers have become in some districts regular battles, with many dead and wounded.

Strangely enough, the high black-market prices for foreign exchange do not prevent the importation of certain valuables into countries where the price of goods is higher than in the foreign country even if the foreign exchange is calculated at the black-market price. This is the case, for instance, with gold bought at the official and even at the unofficial rate in Switzerland; it is smuggled in great quantities to France, although this transaction is strictly forbidden by the Swiss as well as by the French Governments.

2. In countries that are on the other side of the fence, i.e., in which the currencies show a tendency to strengthen at the official rates. Here all other currencies (including United States dollars) are quoted unofficially below the official rates. Thus an opposite problem develops. Switzerland is practically the only country remaining in this category today, since Canada and Sweden have noted the consequences of the strength of their currencies and have revaluated them in terms of dollars.

Regarding frustration of these official rates: The official rate that is higher than the rate at which the trade balance would be in equilibrium works as an impediment to imports. Switzerland would undoubtedly be more competitive on the markets, especially in the United States, if it could purchase the dollar lower than 4.30, say at the rate of “finance” dollars—about 3.40. As Switzerland is extremely import-hungry, especially for raw materials and automobiles, the effect would be beneficial, at least for the time being.

The too high official rate has the effect of a premium on all exports. Because the exporter receives 4.30 for his dollar balances created through exports, instead of 3.50, he is extremely competitive on foreign markets. The consequence is that exports have to be rationed. This is done, for instance, in the watch industry, by the National Bank taking only a limited amount of export dollars at the official rate of 4.30. The amounts taken by the National Bank are, however, so substantial that a one-sided boom of the watch industry has developed which many consider unsound and exaggerated.

Regarding frustration of unofficial rates: if dollars for the purpose of imports were available at the lower rate of “finance” dollars, imports would of course increase.

It is, however, strictly forbidden to use as payment for imports other dollars than those which the National Bank sells at the official rate of 4.30. For the National Bank must get rid of its dollars (purchased from the exporter at the too high price of 4.30) at the same high price of 4.30 to the importer. Nevertheless, this frustration of the “finance” dollar is not quite comprehensible and is fought by many experts in Switzerland. They argue that in an import-hungry country “finance” dollars, too, should be admitted to pay imports; they think that importation would increase to such an extent at the lower dollar rate that not only the floating amounts of finance dollars but also the amounts owned by the National Bank would be absorbed; and they believe that if the latter suffered a loss on these dollars it should be charged to the exporters who allegedly make too high profits anyhow.

THE WAY BACK

Is there a possibility of returning to normalcy? We begin by examining the easier problems that confront the strong-currency countries.

Should we re-establish the gold standard in Switzerland, Sweden, and some other countries?

As has been explained, on the black markets in Switzerland gold is worth roughly 50 per cent more than corresponds to the Swiss gold standard. This is caused by the Swiss National Bank not selling gold freely, but instead strictly rationing it at the official price, so that neither the internal hoarding demand nor the hoarding demand in foreign countries is satisfied.

There is no doubt that the premium on gold would disappear in Switzerland if the National Bank were to sell gold freely at the official price. However, to establish a true gold standard it would be necessary to allow the free exportation of gold; in which case the premium on gold in comparison with the Swiss franc on the black markets of other countries would disappear, the gold being marked down and the Swiss franc improving its price still further.

It is, however, important and interesting to examine the consequences of such re-establishment of a true gold standard even in a strong-currency country like Switzerland. According to the classical scheme, a gold-standard country losing gold experiences—besides improvement of its exchange rate—a deflation because the outgoing gold is paid for by bills which are prevented from being replaced owing to a high discount rate. It seems extremely unlikely that in Switzerland, in spite of the prevailing boom, such a deflationary policy would be tolerated, because there too people have become accustomed to the wrong idea that only under easy-money conditions can full employment be maintained.

However, if one were to try to re-establish the gold standard without establishing a prohibitive discount rate or a system of credit rationing, the bank notes coming back to the National Bank against outflowing gold would be replaced immediately in the economy by bank notes leaving the National Bank on behalf of credits granted by her. In this case, obviously, no deflation could develop, nor would any equilibrium be established in the demand for and supply of gold. Instead, the demand—the quantity of money not being reduced—would remain effective until the last gold coin or gold bar had left the National Bank, thus exhausting her gold reserves in spite of their gigantic proportions—in the way described so masterfully by David Ricardo. For it is not an imaginary gold hunger that pushes the prices for gold upwards, since with hunger alone one cannot buy. It is rather the monetary inflation that produces the high gold prices, which therefore can be suppressed only by monetary deflation. If one wishes to avoid deflation, however, the gold standard can be re-established only at a price for gold that takes into account the existing quantity of purchasing power. In other words, the re-establishment of the gold standard presupposes a devaluation of the currencies against gold.

One of the conclusions reached through a study of monetary conditions in Switzerland is that a truly free gold standard could, at the existing quantity of purchasing power, be re-established in the world currencies only after devaluations. Without devaluations—thorough deflation being extremely unpopular—it will be necessary to continue to frustrate the inflation towards gold by rationing the demand and fixing an artificially low price for the scarce supply; retaining what may be called a pseudo gold standard rather than a true gold standard.

SUPPRESSION OF THE DISCOUNT FOR DOLLARS IN SWITZERLAND

As shown above, United States dollar bills and “finance” dollars sell at about 3.40, whereas export dollars and import dollars are sold at the official or commercial rate of 4.30.

The first question that arises is why one does not treat all dollars alike, establishing one single price for all sorts of dollars at which supply and demand for the entire offered and demanded amounts would balance. In all probability such a price would lie between the official and the free market rates, say at about 3.85. Thus all the difficulties mentioned above would immediately disappear.

It is said in Switzerland that the official rate for the dollar has been maintained at the suggestion of Washington authorities who allegedly fear a loss of prestige if the dollar were to be officially devaluated; but such devaluation has meanwhile been effected in Canada and Sweden without any loss of prestige to the United States. The suggestion would be erroneous in that in Europe the free-market rates rather than the official rates are considered to represent the true strength of a currency, and it is therefore the free-market or finance-dollar rate which would have to be raised to 4.30 for reasons of prestige.

There is no doubt that the free-market rate for dollars could easily be raised in Switzerland if the mechanism of the gold standard were allowed to play between the United States and Switzerland. However, here again the gold standard is frustrated. Just as the National Bank does not sell gold freely, she does not buy it freely. Whereas probably the United States authorities would be prepared to sell as much gold against Swiss francs as they need to buy the floating amounts of finance dollars, the Swiss National Bank does not buy gold for this purpose, although the floating amounts are relatively small now and will become larger only when the Swiss dollar accounts are ultimately unfrozen.

The reason why the Swiss National Bank is reluctant to accept gold freely—or to buy finance dollars—is that she is afraid of the inflationary effects of the Swiss money she has to issue against gold or dollars that she could probably convert into gold at the official United States gold price. However, if one regards the monetary policy of a foreign country as too inflationary, one must decide whether one wants to follow this policy in the interest of the maintenance of stable exchange rates, or whether one wants to become independent of this policy. In the latter case one has to sever the gold standard ties and revaluate the currency—just as one has to devaluate it as England did in the 30’s, if one does not want to follow the deflationary policy of other countries. But one cannot eat the cake of stable exchange rates and keep the cake of internal price stability. For the time being, Switzerland has chosen a middle way—keeping the official rate of 4.30 stable and letting the rate of the finance dollar decline. The artificiality of this solution will, however, as time goes on, force a decision. Either the National Bank will have to buy all sorts of dollars at the present official rate, since those who have invested in United States securities cannot be permanently penalized in comparison with the exporters; and in this case the Swiss monetary policy would become synchronized with that of the United States. Or the National Bank will have to lower the official rate to the rate of the finance dollar, thus revaluating the Swiss franc in terms of dollars. The fight over this question is still going on. The revaluation party argues that inflation on the one side and ever stronger bureaucratic regulations on the other can be avoided only by revaluation. The opposition, consisting mostly of exporters and the hostelries, fears that once the United States reaches full production and begins again to compete at lower prices on the world markets, the revaluated Swiss franc would have to be devaluated again.⁵ The Swiss authorities have officially denied their intention to revaluate. Whether they maintain this stand will depend largely on the development of the purchasing power of the dollar, which is closely watched.

Observation of the international exchange rate markets leads to the conclusion that the United States dollar is internationally not so strong as is generally assumed in the United States. There is no doubt that the dollar is basically a currency of great strength. But any currency can be weakened through a policy that does not take into account that even a very rich country can grant foreign loans only within certain limits. If it surpasses these limits they must lead to a higher price level within the country and to the weakness of the currency in the international money markets. It seems therefore that in order to improve the situation of the dollar a certain restraint in the granting of foreign loans would not be out of place.

SUPPRESSION OF THE PREMIUM FOR FOREIGN EXCHANGE ON THE BLACK MARKETS IN THE WEAK-CURRENCY COUNTRIES

The problem of black-market prices for foreign exchange is identical with the problem of black-market prices on markets in general: the problem of controlling the purchasing power which cannot exert itself on the regular markets and which overflows to the black market.

One method of dealing with the superfluous purchasing power that overflows on the black markets for foreign exchange would be to let the official rates rise to the point where supply and demand are in balance. This was more or less what happened in the weak-currency countries after World War I. With rising official rates, exports from the weak-currency countries would increase. Imports would of course become more expensive, but—owing to the increased exports—probably not scarcer. They could even increase quantitatively, just as on the internal markets the lifting of ceiling prices makes products more expensive but also more plentiful because marginal plants begin to work again.

On the other hand, it is clear that while imports would on the whole increase, distribution among the population would be changed to the disadvantage of the masses, who would have to pay the higher prices without being compensated through higher profits as the entrepreneurial class would be. There is no doubt that a policy increasing imports as a whole but diminishing the share of the masses would be highly unpopular and politically unfeasible.

Another method of suppressing the margin between black and white exchange rates would be to deflate the purchasing power until under the pressure of this deflation the black-market prices receded. This was the method followed by Schacht at the beginning of the stabilization of the mark in 1923. Such a deflation—which would have to include deflation of wages, too, if mass unemployment were to be avoided—would hardly be feasible for political reasons.

Incidentally, whatever method is chosen to narrow the margin between black and official prices, the internal price and wage level would always have to remain relatively low in comparison with the price of foreign exchange rates. For as long as there exists a mistrust of the domestic currency, exporters, investors, and speculators will part with the foreign currency they receive only if the exchange rates take this mistrust into account. A price for foreign exchange at which demand and supply would balance could thus be maintained only at a relatively low wage level. In other words, the population would have to work cheaply in comparison with prices of import goods because it has to bear the confidence premium for the foreign exchange with which imports are paid.

This confidence premium would of course increase in case of anticapitalistic threats by governments or political parties. For it is the tragedy of socialistic experiments in an otherwise non-socialistic economy that they achieve the contrary of what they aim at. They do not better, they actually worsen, the conditions of the masses because it is the latter who ultimately must pay for the fear that socialistic measures arouse in those who possess or produce wealth.

This shows the only practical and politically possible way that would lead to the abolishment of black markets for foreign exchange in the weak-currency countries. It is to restore confidence in the domestic currency. Only in this way can the purchasing power overflowing to the black markets be sterilized without a painful deflationary process. Only in this way can the mistrust-discount of the domestic currency be suppressed. In order to establish confidence in the domestic currency it is above all necessary to balance the budget. Furthermore, everything must be done to give small and large capitalists the feeling that it is not only forbidden but also unreasonable to export their capital. Whether, especially in France, under the prevailing internal and external political conditions a policy of restitution of confidence is possible may be doubted. But what is not doubtful is that without such a policy sound conditions in the field of foreign currency cannot be regained.

HOW ABOUT BRETTON WOODS?

It is obvious that nothing experienced today in the field of foreign exchange in Europe fits in the slightest degree into the picture that the Bretton Woods agreements presuppose. In fact, Europe is not even yet in the so-called transitory period where currency restrictions work. It is in a pretransitory stage where not even currency restrictions are able to maintain orderly conditions.

Without reopening the discussion about Bretton Woods, one thing can be said: observations of conditions in Europe show—what critics of Bretton Woods have always emphasized—namely, that for the stabilization of currencies the stabilization of underlying political and financial conditions is overwhelmingly essential, and that technical devices and a stabilization fund as provided by the Bretton Woods agreements are of relatively small importance. Therefore one cannot help feeling that in all probability the Bretton Woods fund will not be essential for the stabilization of the postwar currencies. There is a good chance that for all practical purposes it will be replaced by individual credit arrangements coupled with certain guarantees to the creditors on the economic and fiscal policy to be followed by the debtor nations.

* Appeared first in The Commercial and Financial Chronicle, August 22, 1946.

¹ These quotations are taken from the weekly bulletin of the well-known private bank of Julius Baer & Co. in Zürich.

² Again according to the bulletins of Julius Baer & Co.

³ The gold premium is not only much higher than the premium for Swiss francs but also fluctuates from country to country in terms of Swiss francs too.

⁴ As the black-market prices have meanwhile sunk somewhat, the above transactions, while still possible, are no longer quite so profitable as they were.

⁵ The fears of the opposition have meanwhile proved to be correct. The Swiss balance of trade has become very passive. On the other hand, the finance dollar has gone up and fluctuates somewhere around 4 francs. There is, therefore, no question any more of revaluating the Swiss franc. Once the dollars from the defrozen accounts are absorbed, the finance dollar will probably reach the official parity. The wait and see policy of the National Bank and their refusal to revaluate has been vindicated in contrast to the revaluating policy of the Swedish Government, which proved disastrous for the country.