2. The Two Monetary Markets

(L’Opinion, January 1, 1948)

Money is not only exchanged for merchandise; it is exchanged also for foreign moneys. The public, in general, knows only the first of these two markets. That is the gravest of errors.

In fact, the market “money-against-merchandise” (which, to simplify, we may consider as a whole) becomes each day a little more free. In any case, the prices at which money is exchanged for products are known. Notwithstanding certain regulations, still exaggerated, transactions are performed without difficulty.

On the contrary, the market “French money for foreign money” has been suppressed. It is not only regulated, but forbidden. The foreign-exchange rates and the prices of gold (which one may consider as a currency) are known only through the black market. The dealers in currencies or gold are looked upon as delinquents. All the transactions permitted with a foreign country and their settlement are made according to an arbitrary rate, fixed by the Bureau of Foreign Exchange, and have remained unchanged for the last two years.

As long as this situation prevails, all the efforts made within the country to stabilize money will be of no avail. The reasons are clear.

We know that the market in foreign currencies (and in gold) has as effect, first of all, to balance international commerce: the increase in the value of the franc, by increasing for the foreign market the price of French merchandise, causes immediately a restriction on French exports and an increase in foreign imports into France.

On the other hand, every decrease in the value of the franc has the effect of increasing French exports. Without this mechanism there is no way to balance purchases and sales in foreign countries. One can fix the amount of imports (on condition that we find the necessary credits for payment) but no decree can influence the amount of exports, which depends exclusively on foreign demand.

This mechanism is well known. But there is another which one notices more rarely: the foreign exchange market has an immediate and powerful effect on the interior money-for-merchandise market. As every increase in the price of the franc has the effect of increasing the mass of products offered on the French market, the immediate result is a decrease in the price of the products and a decrease, consequently, of the cost of living in France.

Let us go further. The fluctuations in the foreign exchange market have greater effect on the level of prices within the country than the efforts at deflation that one may attempt directly on these prices.

This has happened often and there are numerous examples.

A domestic deflation tending to reduce the purchasing power, has practically no influence on prices if it is not accompanied by a considerable increase in the products offered. Thus, an increase obtained solely by domestic production is necessarily very slow, whereas the increase of the franc on the foreign exchange market has an almost immediate effect.

Let us add that the increase in the value of the franc on the foreign exchange market being easy to verify, this increase causes an almost immediate unloading of merchandise within the country, and contributes, through a new mechanism, to the reduction in the cost of living. This unloading is much longer in coming if it results from interior deflation influenced only by the index of prices.

The Belgian example, which is cited so often, far from refuting these findings, confirms them completely.

Evidently, the fall of the franc on the foreign exchange market would produce reverse effects. But in the present situation of the French currency, with the Marshall Plan merchandise being almost free and having no impact on the foreign exchange market, with the effort to balance the French budget, and with the possibility of an outside loan for stabilization, everything indicates that the tendency of the foreign-exchange market will be toward an increase and not a decrease in value of the national currency.

It is a matter requiring tact on the part of the monetary authorities.

The progressive liberation of the foreign exchange market is an indispensable condition of the success of our financial reform.