State intervention to assure to the community the
necessary quantity of money by regulating its international movements is
supererogatory. An undesired efflux of money can never be anything but a
result of State intervention endowing money of different values with the
same legal tender.
All that the State need do, and can do, in order
to preserve the monetary system undisturbed, is to refrain from such
intervention. That is the essence of the monetary theory of the
classical economists and their immediate successors, the Currency
School. It is possible to refine and amplify this doctrine with the aid
of modern subjectivist theory; but it is impossible to overthrow it, and
impossible to put anything else in its place. Those who are able to
forget it only show that they are unable to think as economists.
Ludwig von Mises
The Theory of Money and Credit, p.
249
PEOPLE ADVOCATE identical economic policies for very
different reasons. The recent interest, both practical and theoretical,
in the subject of international monetary exchange rates is a point in
question. Advocates of flexible exchange rates, in which a free market
in international monetary transactions would set the prices of various
currencies, include monetarists - who would have each government manage
its own nation's money supply - as well as those who believe in a full
gold coin standard to preclude government control. Opponents of flexible
international exchange rates, on the other hand, include not only the
creators of the Bretton Woods agreement that established the
International Monetary Fund but also a number of conservative
economists.1 How is it possible that the camps could be
divided in this fashion?
To answer this, one has to examine the contexts. Ludwig
von Mises, for instance, believes in total freedom in the monetary
sphere: the government should be limited to the enforcement of
contracts, whatever the exchange medium might be in any particular
contractual obligation. Milton Friedman also wants to see all citizens
free to own gold and to make contracts in gold, but he thinks the
central bank should guarantee a constant increase in the supply of money
each year. Mises would reject such a proposal as inflationary, unless
the legal tender provision of Federal Reserve Notes were abolished and
people were thereby free to avoid doing business in fiat money. But
neither man wants to see any infringement on the right of men and women
on either side of the border or ocean to make bargains with each other,
even if those bargains involve the exchange of national monetary units,
present or future.
The Keynesians, who would prefer Friedman's views on
monetary management to Mises' full gold coin standard, find themselves
working together with conservative economists who support a gold
standard and are anti-inflationary in perspective. Both the Keynesians
and these conservatives favor the establishment of government-enforced
limits on the range of prices that can legally exist between one
currency unit and any other. Unfortunately, no economist seems to be
able to agree with any of his colleagues as to the precise acceptable
range of price flexibility or the legal mechanism used to enforce such a
range; this indicates the nature of the problem. Year after year, the
publications of the International Finance Section of the Department of
Economics of Princeton University pour out Essays in International
Finance. We read of crawling pegs and running pegs, of parities and
currency swaps, of paper gold and international trust. What does it all
mean? So far, no one has even been able to define a Eurodollar, let
alone explain how it works; or if someone can, no colleague agrees with
him.2
No Faith in Freedom
The Keynesian economist simply does not trust the free
market's unhampered price mechanism to clear itself of supplies of
scarce economic resources. Thus, we need fiscal policy, fine tuning of
the economy, econometric models, data gathering on a massive scale, and
controls over the money supply. Especially controls over the money
supply. Naturally, certain flaws appear from time to time: a $1.5
billion predicted surplus for fiscal 1970 became a $23.3 billion
deficit, but what's a few billion dollars among friends? We owe it to
ourselves, right? A private firm, unless it has a cost-plus government
contract, would not long survive in terms of such a woefully inefficient
economic model, but what do businessmen know about economics, a faithful
econometrician may ask? If reality does not conform to the model, scrap
reality, by law.
So reality is scrapped, and the Keynesian finds it
necessary to abandon one more area of market freedom, namely the freedom
of private, voluntary international exchanges of money at prices
established by the market. Such a voluntary system of international
exchange would reduce the predictability of the government's econometric
model. That would allow a "bleeder" in the overall control device. That
would allow men to measure the extent of the depreciation of their own
and other's domestic currencies, thus calling attention to the policies
of inflation and confiscation being enforced by their governments and
other governments. As for the United States, floating exchange rates on
a free international market for currencies would end, overnight, the
exported inflation of our continual budgetary deficits.3 That
is why government bureaucrats do not generally approve of floating
exchange rates.
Flexible Exchange Rates: A Counsel of Despair?
This does not explain why various conservative
economists also oppose the extension of the market into the realm of
international monetary exchange. The late William Roepke called the idea
"a counsel of despair."4 His argument against flexible
exchange rates: "Without stability of exchange rates any international
monetary system would be flawed at an important point, because it would
lack a major condition of international economic integration." This
sounds plausible enough, until one reads his next sentence: "Just how
important this condition is will be seen if we reflect that national
economic integration (among the separate regions of one country) is
unimaginable with fluctuating rates of exchange between, say, regional
currencies."5 The government's answer to this "unimaginable"
process of regional currencies is to establish a central monopoly of
money creation coupled with a legal tender law. And this is precisely
the goal of international socialist planners: a single world bank with a
legal tender law to enforce its control over the entire face of the
earth.6 The planners want a "rational" world economy, but
their faith is in bureaucratic rationalization - a bureaucratic
hierarchical chain of economic command -and not the rationalization that
is provided by a voluntary free market and its sophisticated computer,
the free market price mechanism.7 As yet, they have not
achieved such "rationalization" simply because all the nations want
their own domestic, inflationary, autonomous "rationalizations." Fixed
exchange rates are as close as they can come to centralized world
planning, so they tried it, by means of the International Monetary Fund,
from 1947 until August 15, 1971. On December 19 they returned to the
familiar policy of fixed exchange rates. Four months of international
monetary freedom were all they could take.
Let the State Control Itself, Some Conservatives Argue
Why do conservative economists lend support to fixed
exchange rates? Because they think that this is a form of statist
intervention into the world market which can impose restraints on the
state's own policies of domestic inflation. The state, the argument
goes, will control itself by law. To some extent, this may be true,
temporarily. The fear of an international run on the dollar may have
restrained the Federal Reserve System's expansion of the domestic money
supply from December, 1968 through the spring of 1970. Officials may
have feared the action of foreign central bankers in demanding gold at
the promised price fixed by 1934 law of $35 per ounce. But this slowing
in the money supply created an inevitable reaction: the stock market
fell by one third, and the government could no longer finance its debt
through sales of bonds to individuals or private corporations.
Therefore, the Federal Reserve stepped in once again to purchase the
available government bonds at the preferred low interest rate. A new
wave of inflation began in the spring of 1970. The pressures on the
American gold stock rose once again, and the President finally escaped
on August 15, 1971 -or hoped that he had. He cut the dollar's official
tie to gold in international payments and left it free to float on the
international markets. Of course, this act was a violation of
International Monetary Fund rules, to which the United States is a party
(or was). As Lenin said, treaties are made to be broken.
For a time, fixed exchange rates seem to restrain
policies of domestic monetary inflation. But for how long? Franz Pick's
report lists devaluations every year, and there are a lot of them. They
are international violations of contract violations that call into
question the whole structure of international trade. The honoring of
contracts is the very foundation of free exchange. Apart from this,
economic prediction becomes exceedingly difficult and productivity
suffers. Thus writes Alfred Malabre:
International currency exchanges can transpire in
various ways. One is through a system where Currency A can indefinitely
be exchanged at a fixed rate for Currency B. This is the system that
allegedly prevailed through most of the post-World War II era and to
which most Western leaders now wish to return. Ideally, it's a
magnificent system, because it promises to eliminate uncertainty from
international financial dealings. The widget maker knows, when he gets
an order from abroad, that the money he will receive will be worth as
much to him in the future as at present.
In practice, however, fixed-rate arrangements provide
anything but certainty. Between 1944, when the present fixed-rate system
was conceived at Bretton Woods, N.H., and mid-August [1971], when the
system finally collapsed, 45 countries changed the international rates
for their currencies. In some instances, changes were repeated many
times, so that in all 74 currency-rate changes occurred.8
The problem with such devaluations, as Mises has shown,
is that they create incentives for retaliatory devaluations on the part
of other governments, "At the end of this competition is the complete
destruction of all nations' monetary systems."9 If there were
no fixed exchange rates in the first place, there would be no need for
these governmentally imposed economic discontinuities.
International Stability, a Myth
The myth of international monetary stability is just
that, a myth. Stability can only be approached, like economic
equilibrium, and then only by the f ree price mechanism. Exchange rates
cannot be fixed without increasing the pressures for the radical
discontinuities of revaluation and devaluation. That is why the IMF
rules allowed for a 1 per cent band, upward or downward, of flexibility
in exchange rates. That is why rules imposed since December 19 allow a
currency a plus or minus 2.25 per cent band. 'But flat exchange rates
cannot supply stability in a world of flat currencies; they can only
mask the extent of mutual inflation through an illusion, the illusion of
fiat stability. And inevitably, the illusion will be broken, sooner or
later, as on August 15.
Fixed exchange rates create an enormous temptation
among men whose professional careers are, in a planned economy,
dependent upon deception. Fixed exchange rates, themselves a practical
absurdity in a world of fiat currency, create a premium on lying. When
Sir Stafford Cripps promised that the pound would not be devalued
throughout the first nine months of 1949, he led the people to believe
that no devaluation was going to take place. And yet it did on September
18, 1949. John Connally had to admit his own part in a similar deception
in his August 16 press conference. What else could we do, he pleaded.
What else indeed? Once you start the big lie-that exchange rates can be
fixed by law without serious economic consequences -you just cannot
stop.
Polylogism!
Any economist, of whatever school of thought, can tell
you why bimetallism failed in the late nineteenth century. The legal
parity between gold and silver, unless changed continually, could not
match the true conditions of the forces of supply and demand between the
two metals. Thus, one or the other precious metal was always in short
supply at the fixed price. The attempt to enforce such a fixed ratio led
to monetary disequilibrium -Gresham's Law - in which the artificially
overvalued currency drove the artificially undervalued currency out of
circulation and into either hoards or foreign countries. Thus it is with
every attempt of government at any kind of price control. Thus it is
with fixed exchange rates.
Ask the economist who has just demonstrated to his own
satisfaction that bimetallism is impossible, since the state cannot
successfully set a fixed exchange rate between gold money and silver
money, to extend his analysis to dollars and pounds or francs and marks.
Then watch him squirm. Logic, when applied to the case of gold and
silver, somehow becomes inoperable when applied to dollars and pounds.
Mises has an expression for this: polylogism. It is his most
contemptuous expression. Mises, of course, subsumes exchange rate fixing
under the general theory of exchange, thus following the logic of
bimetallism through to the logic of the impossibility of permanent fixed
exchange rates in international monetary transactions.10
Professor Mises long ago had demonstrated the utter
bankruptcy theoretically of fixed exchange rates and their tendency to
lead to national bankruptcy in practice. He did so in his 1912 classic,
The Theory of Money and Credit, and in Human Action. The general theory
of monetary exchange starts from a premise:
For the exchange-ratio between two or more kinds of
money, whether they are employed side by side in the same country (the
Parallel Standard) or constitute what is popularly called foreign money
and domestic money, it is the exchange-ratio between individual economic
goods and the individual kinds of money that is decisive. The different
kinds of money are exchanged in a ratio corresponding to the
exchange-ratios existing between each of them and the other economic
goods.11
In other words, if 1 ounce of gold is exchanged for 10
pounds of another commodity and 1 ounce of silver is exchanged for 1
pound of that same commodity, then the exchange-ratio of gold to silver
should be 1:10. Fifty years later, Mises was still saying the same
thing:
The final prices of the various commodities, as
expressed in each of the two or several kinds of money, are in
proportion to each other. The final exchange ratio between the various
kinds of money reflects their purchasing power with regard to the
commodities. If any discrepancy appears, opportunity for profitable
transactions presents itself and the endeavors of businessmen eager to
take advantage of this opportunity tend to make it disappear again. The
purchasing-power parity theory of foreign exchange is merely the
application of the general theorems concerning the determination of
prices to the special case of the coexistence of various kinds of
money.12
That last sentence is crucial. Exchange rate theory is
simply a subordinate application of the more general theory of price.
Mises continues:
Let us consider again the practically very important
instance of an inflation in one country only.
The increase in the quantity of domestic credit money
or fiat money affects at first only the prices of some commodities and
services. The prices of the other commodities remain for some time still
at their previous stand. The exchange ratio between the domestic
currency and the foreign currencies is determined on the bourse, a
market organized and managed according to the pattern and the commercial
customs of the stock exchange. The dealers on this special market are
quicker than the rest of the people in anticipating future changes.
Consequently the price structure of the market for foreign exchange
reflects the new money relation sooner than the prices of many
commodities and services. As soon as the domestic inflation begins to
affect the prices of some commodities, at any rate long before it has
exhausted all its effects upon the greater part of the prices of
commodities and services, the price of foreign exchange tends to rise to
the point corresponding to the final state of domestic prices and wage
rates.
This fact has been entirely misinterpreted. People
failed to realize that the rise in foreign exchange rates merely
anticipates the movement of domestic commodity prices. They explained
the boom in foreign exchange as an outcome of an unfavorable balance of
payments. The demand for foreign exchange, they maintained, has been
increased by a deterioration of the balance of trade or of other items
of the balance of payments, or simply by sinister machinations on the
part of unpatriotic speculators.13
The Speculator's Role
The speculators perform a crucial set of services,
contrary to popular opinion. They help balance the supply of and demand
for future moneys. In doing so, they help to reduce the zone of
uncertainty about the future. Second, they also alert citizens of any
given country to the monetary policies of their own central bank. If the
policies of monetary expansion are being pursued by the central bank,
the speculators will reveal this fact, daily, to anyone wishing to
consult a financial newspaper. The citizen receives information from an
impartial source concerning the latest opinions of skilled, competitive
and domestic monetary experts concerning the stability or lack of
stability of his own country's money. Because of this, the freedom of
the international monetary speculator is as crucial to the defense of
free institutions as one might imagine. Hamper his activities, and you
have taken a sinister step away from freedom. The bureaucrats know this:
What those governments who complain about a scarcity of
foreign exchange have in mind is, however, something different. It is
the unavoidable outcome of their policy of price fixing. It means that
at the price arbitrarily fixed by the government demand exceeds supply.
If the government, having by means of inflation reduced the purchasing
power of the domestic monetary unit against gold, foreign exchange, and
commodities and services, abstains from any attempt at controlling
foreign exchange rates, there cannot be any question of a scarcity in
the sense in which the government uses this term. He who is ready to pay
the market price would be in a position to buy as much foreign exchange
as he wants.
But the government is resolved not to tolerate any rise
in foreign exchange rates (in terms of the inflated domestic currency).
Relying upon its magistrates and constables, it prohibits any dealings
in foreign exchange on terms different from the ordained maximum
price.14
Radical economic discontinuities are difficult to
predict-far harder than economic countinuities. The steady movement of
international exchange transactions in terms of an unhampered free
market is basic to economic continuity. Impose fiat exchange rates, and
you create the "stability plus devaluations" program which the Bretton
Woods agreement imposed on the world. You create the "hot money" effect,
as currency speculators are forced to anticipate radical jumps in the
fiat exchange rates, thereby encouraging them to transfer billions of
dollars or marks or pounds or francs from one country to another, trying
to beat the imposition of September 18ths or August 15ths.15
It is a huge game of musical chairs, except that people's
lives-economically, politically, and physically are at stake. In the
1949 edition of Human Action, Mises wrote, concerning "hot money": "All
this refers to European conditions. American conditions differ only
technically, but not economically. However, the hot-money problem is not
an American problem, as there is, under the present state of affairs, no
country which a capitalist could deem a safer refuge than the United
States."16 It is a testimony to the monetary inflation of the
past twenty years in this country that Mises saw fit to drop that
footnote from the 1963 and 1966 editions of his book.
Instability'
Wouldn't the establishment of a totally free market for
international monetary transactions add elements of instability into
international economic affairs? Emphatically no! What it would do is to
present a highly accurate reflection of the economically irrational
policies of fiat money creation that are being pursued with a vengeance
by almost every government on earth. It would serve as an economic
mirror which would answer truthfully the question, "Mirror, mirror on
the wall, who has the most honest currency of them all?" Daily, the
international money mirror would answer the truth and it would also give
its guess as to the answer at any point in the future concerning any
given currency. Like the wicked witch of Snow White, domestic magicians
of fiat money resent that inescapable answer. So they buy themselves a
new mirror - fixed exchange rates. Unfortunately, these fiat mirrors
break periodically, causing great confusion, consternation, and windfall
profits and losses to speculators. And, need we be reminded, everyone
involved in foreign trade - prospective buyers of Volkswagens and Hong
Kong toys included - is an international speculator.
Instability is the charge that is always made against
the market by statist interventionists. Marx and Engels leveled
precisely this criticism of the theory of capitalistic economics.
Capitalitstic distribution, they argued, is anarchistic.17
Such a view of capitalist processes stems from a fundamental
misconception: supposedly, there are no laws of economics regulating the
voluntary exchanges which take place in the free market, and therefore
fiat state rules must be imposed on the "disorder" of market affairs.
Everywhere these critics look, the free market tends toward instability
- an instability defined as anything deviating from that model which a
central planning board would impose on the economy. "Pass a law! Make it
stable!" Not quite. "Pass a law! Make it rigid! Watch it break!" That's
it exactly; the breaks, in international monetary affairs, are called
devaluations and revaluations. They happen all the time.
The Subsidy to Business
If you do not impose fixed exchange rates, we are told
by various conservative economists as well as by neo-Keynesians, you
will see the destruction of international trade. Businessmen apparently
cannot afford to bear the terrible uncertainties associated with forward
currency speculation. How do we know this? Because businessmen, who have
become used to international price controls on money-fixed exchange
rates-and who have learned how to make profits under such
interventionist measures, constantly tell us so. Like the farmer who
wants his subsidy (fixed parity prices guaranteed to him by the state
for his goods), like the domestic producers of steel who want tariff
subsidies, like the airlines that want price floors for their flights
(whether international or domestic), like the labor union leader who
wants compulsory bargaining legislation, the foreign trade entrepreneur
wants his contract guaranteed by fixed exchange rates. He just cannot
bear the uncertainties of future prediction, in spite of the fact that
all entrepreneurial profit is a residual accruing to successful
predictors.18 Instead, the state is supposed to bear the
uncertainties of prediction. The state is supposed to worry about the
rate of exchange of its currency with any other currency, at any time.
The bureaucrat in a state office is supposed to take the responsibility
that at a particular point in the future the currencies of the world
will trade at certain fixed parities. Let the violent intervention of
the state compel men on both sides of any border to accept each other's
currencies at a legal rate, and you have turned the economic affairs
associated with international trade over to the bureaucrats. The
entrepreneurs, by allowing state officials to bear the responsibility
for certain aspects of international trade, thereby give to the state a
great power over their businesses. Thus, citizens in every country lose
their personal freedom to that extent.
Why is it that private entrepreneurs involved in
international trade want the government to take over the responsibility
for organizing the terms of the monetary exchanges which govern the
operation of their businesses? This is a familiar tale. It is the old
respected argument of the vast majority of people: let my suppliers
compete, keep my competitors out of the market. Let others bear the
burden of predicting the future. Subsidize me. I'm the important one.
And governments do it. They take profits away from one group
-international currency speculators -and guarantee the price of foreign
exchange -almost. Unless there is a devaluation, of course. And then it
is every man for himself and any port in a storm. (The port is usually
Switzerland.)
Counting the Costs of intervention
A key rule was laid down by Jesus to his disciples:
count the cost (Luke 14:27-30). He was speaking of spiritual matters,
but as he so often did, he explained them in terms of familiar economic
affairs. That principle has been the economic foundation of Western
civilization, and especially of capitalism. It is, specifically, the
inability of socialist economies to count the costs of anything that
constitutes the most patent economic failure of socialism.19
It is the genius of the free market that it allows voluntary, flexible
pricing of scarce economic resources. Apart from this free pricing
mechanism, there can be no free market economy, by definition, and no
economic calculation.
When a state inflates its monopolistically controlled
domestic currency - which it could not do if it did not hold the
monopoly - it creates many problems for the economy. It makes
forecasting more difficult. This leads to the demand for more controls
over the economy - to mitigate the effects produced by the very policies
of monetary inflation. These controls are an attempt by bureaucrats to
disguise these effects. The effects are called rising prices. The
controls are called price, and wage controls.
On August 15, 1971, the President of the United States
an-nounced the unmitigated failure of the IMF agreements of 1944. The
gold-exchange standard no longer operated, as it had for 25 years, to
shield this country from the effects of its own policies of monetary
inflation. So it was scrapped. Bretton Woods is dead, Arthur Okun
announced a few hours later. Conservative economists - a few of them at
least - had been saying that since 1945. The President announced that
the cure for this unparalleled economic failure of international finance
would be the complete abandonment of fixed exchange rates
internationally. International price controls over the free exchange of
money, we were told, were clearly leading to economic disaster. Indeed,
that was exactly where such controls were leading, as all interference
with prices will invariably lead.
Domestically, however, volun-tary pricing had led to
another disaster: higher prices. The President failed to mention that
Federal deficits financed through Federal Reserve fiat money creation
had caused prices to rise. So to "cure" domestic economic affairs, the
President imposed price and wage controls. There is a peculiar sort of
irony here. In order to cure an international economic disaster which
had been caused by price controls, the President allowed the dollar to
float. In order to cure the domestic economic disaster, the President
imposed domestic price controls.
Controls in international monetary affairs are
specifically designed by bureaucrats to hide the effects of policies of
domestic monetary inflation. Similarly, controls on domestic prices are
designed to hide the effects of those same policies of domestic monetary
inflation. If the purpose of controls is to hide effects rather than to
remove causes, then they involve the use of fraud.
What the advocates of a free market should desire is
that the price system be left completely uncontrolled, in order that it
might register the subtle and unsubtle shifts in economic external
conditions. Only then can entrepreneurs predict the future with any
degree of success. Only then will those who wish to buy at the best
possible price be served. Everyone should count the cost of his actions.
Price controls interfere with such cost accounting.
Exposing Inflation
Advocates of floating exchange rates may be advocates
of domestic monetary inflation. But so can advocates of fixed exchange
rates, as Keynes would seem to demonstrate. The issue is not whether
floating exchange rates will make it easier for domestic governments to
inflate. The issue is whether price controls are legitimate tools of
government economic policy. If they are, then we can begin to examine
the specifies of the arguments for fixed exchange rates. If they are
not, then the debate is ended. For fixed exchange rates are, by
definition, price controls.
Good economic theory results in good economic practice,
as Mises and Hayek have explained repeatedly. We do not apply sound
economic theory and produce economic disaster. Thus, it is possible to
argue that free pricing in international monetary affairs will be
beneficial to all citizens who wish to enter the market in order to make
voluntary exchanges. Free pricing among the various national currencies
will help to expose the policies of monetary inflation in any given
nation, thereby adding incentives to citizens of that country to
challenge their government's policies. This, of course, assumes that
citizens generally are economically rational and prefer good
consequences to bad ones. It is easier for a man to count the costs of
socialism in the monetary sphere if he can witness, daily, the
statistics that chronicle the deterioration of the purchasing power of
his money.
Let Citizens Own Gold
If a citizen can own gold, so much the better. If a
free market in gold is allowed to operate, so much the better, for the
price of gold, in relation to the citizen's paper currency, will rise as
a consequence of the continuing monetary inflation. This gives a citizen
the opportunity to make a profit by taking his paper money to the local
branch of the national Treasury and buying gold at the fixed, legal rate
of exchange (which has become a legal fiction as a result of the
monetary inflation).
Let citizens, rather than the state, profit from the
higher price of gold. Let their desire to make a profit act as a barrier
that helps to retard state officials in their inflationary policies, as
the Treasury's supply of gold decreases.
A fixed rate of exchange between gold and a currency is
not the same thing as fixed rates of exchange between currencies. A
fixed ratio between gold and any particular currency is definitional: a
unit of paper money is said, by definition, to represent so much gold at
a specific fineness. Free convertibility of a currency into gold
requires a legalized fixed ratio of exchange; free convertibility of one
national currency with any other requires a flexible rate of exchange
set by the market. The former is a definitional relationship; the latter
cannot be.
Obviously, the best possible world would be one in
which no government has any monopoly of credit or money creation, where
all citizens all over the globe have the right to own gold and make
contracts in gold. But just because utopia has not arrived, there is no
reason to abandon the theory of voluntary exchange at unhampered prices.
The argument we hear so often today is this: "Given the government's
monopoly over money, given policies of deficit financing through
monetary inflation, given domestic legal tender laws, we therefore need
price controls over international monetary exchange." Polylogism! The
fact that we find ourselves in an increasingly socialistic economy in no
way disproves the theoretical validity of free pricing - any time, any
place, under any circumstance. If the theoretical (and therefore the
practical) validity of free pricing is undercut in any way simply
because of all the socialistic "givens" that we operate under, then Marx
was right, Hegel was right, the German historical school of economics
was right, institutional economics is right, historicism is right, and
economic theory is wrong.
Multiple interventions
There is a tendency, argues Mises, for one intervention
by the state into the economy to lead to another intervention. The
disruptions caused by the first intervention lead to cries for further
political intervention to solve them. The state takes control of money,
to "reduce the irrationality of the domestic money markets." (And to
arrogate unto itself ultimate sovereignty.) Then it inflates the
currency in order to increase its own influence in the affairs of men by
gaining access to scarce economic resources with the inflated currency.
Then citizens refuse to accept the debased money. So the state's
officials pass legal tender laws. The money, now artificially
overvalued, drives out both gold and silver. People prefer to trade in
the artificially overvalued money and either hoard the gold and silver
or send it abroad where it can purchase foreign goods cheaper than the
domestic inflated currency can purchase them. As domestic goods climb in
price due to the inflated paper currency, imports increase and dollars
flow out; foreign central banks then raise the price of their currencies
in relation to dollars. The United States government realizes that this
exposes its policies of domestic monetary inflation and therefore
presses for fixed exchange rates.
Then foreign governments, buried in dollars (at the
artificially low price), begin to demand gold (held by our government at
an artificially low 1934 price). One intervention leads to another,
usually. But not always.
The exception came on August 15. Basically, the
President had three choices. First, balance the budget and stop the
monetary inflation -maybe even use the surplus of revenue over
expenditures to reduce the national debt. Unfortunately for political
purposes, such an action would have risked depression and high
unemployment (given the previous policies of monetary expansion and the
downwardly inflexible wage rates that prevailed in a unionized
economy).20 Second, continuing the deficits, he could let all
of our gold (their gold, really, given our promise to pay on demand)
flow out. Third, the President could have established floating exchange
rates and cut the redeemability of the dollar in terms of gold. This is
exactly what he did. It involved a return to free market pricing of
international monetary exchanges. He believed that it was preferable to
do this than to take either of the first two steps. In this sense,
pressures internationally on the dollar forced the President to return
to a policy which was closer to the free market than the policy of fixed
exchange rates which had been established by the IMF in 1947. Naturally,
to make the operation truly conservative, he should have maintained the
free convertibility of gold provision and reestablished it domestically
with American citizens. This did not detract from the basic move which
he made; namely, to reestablish free floating exchange rates in which
voluntary transactions of money internationally can prevail. By
returning to fixed exchange rates on December 19, the President thereby
abandoned the advance made on August 15, reestablishing the rigidities
that lead toward economic discontinuities.
Yet what did we find between August 15 and December 19?
Many advocates of free market economics were howling bloody murder!
"Free pricing is fine, and all that, but, given prior interventions by
the government. . ." Leonard Read is right: "We are sinking in a sea of
buts" 21
Return to Gold
What is the proper position with respect to valid
international money? Clearly, a money system which is the product of
free men, voluntarily exchanging scarce economic resources. Professor
Murray Rothbard has given us a picture of what such a system might be:
Why not freely fluctuating exchange rates? Fine, let us
have freely fluctuating exchange rates on our completely free market;
let the Rothbards and Browns and GMs fluctuate at whatever rate they
will exchange for gold or for each other. The trouble is that they would
never reach this exalted state because they would never gain acceptance
in exchange moneys at all, and therefore the problem of exchange rates
would never arise.
On a really free market, then, there would be freely
fluctuating exchange rates, but only between genuine commodity moneys,
since the paper-name moneys could never gain enough acceptance to enter
the field. Specifically, since gold and silver have historically been
the leading commodity moneys, gold and silver would probably both be
moneys, and would exchange at freely fluctuating rates. Different groups
and communities of people would pick one or the other money as their
unit of accounting.22
Floating exchange rates reflect what the prevailing
external economic conditions really are. The rule governing the
operation of floating exchange rates is identical to the rule operating
in all computer affairs: "Garbage in, garbage out." If prevailing
economic conditions on the international markets are inflationary, then
floating exchange rates will respond appropriately, making the best of a
very bad situation. If a full gold coin standard exists internationally,
then floating exchange rates will make the best of a very good
situation. Floating exchange rates are nothing more and nothing less
than freely fluctuating voluntary prices on international markets (even
if the primary participants are national central banks). Like all other
forms of free pricing, floating exchange rates make things better than
things would be under coercive price controls. Floating exchange rates
should not be regarded as some kind of economic panacea for the world's
inflationary conditions, except insofar as free pricing is always a
panacea in relationship to the conditions which exist under government
imposed prices. No matter what other external conditions may be
inflationary, deflationary, relatively stable, gold standard, fiat
standard, electric money standard, or any other standard conceivable to
the mind of man - free pricing is always preferable to fiat price
controls. Always.
There is no doubt that domestic monetary inflation,
especially if carried on by a majority of national governments, produces
great uncertainties in international trade. There is also little doubt
that floating exchange rates impose the burden of dealing with these
economic uncertainties on the shoulders of those who wish to participate
in international trade and who expect to profit from such voluntary
exchanges. These people are precisely the ones who should bear the
burdens associated with economic forecasting. They are all
entrepreneurs. If they resent the uncertainties associated with
international trade in a world of flat money, then they should put
pressure on their respective governments to restore a full gold coin
standard domestically. They should not be lured by the siren call of
statist price controls to reduce the visible effects of statist policies
of domestic monetary inflation.
If we want stable exchange rates, then there is one
way, and only one way to get them: each government must impose upon
itself the restraint of the full gold coin standard, give up its
monetary monopoly, return the right of gold ownership to its citizens,
and spend only that money which is raised directly through taxation.
That is the way to achieve the goal of international monetary stability
- not rigidity, but calculable, predictable, moderate
stability.23 The rule of gold alone has proven itself to be a
producer of international monetary stability. That rule, and not the
rule of government bureaucrats, is the foundation of monetary
stability.24
The conclusion should be obvious: all advocates of free
markets should call for solutions that promote economic freedom. If the
proposed solutions do not promote free pricing on free markets, they are
fallacious solutions. Fixed exchange rates limit the voluntary economic
exchange of goods among free men. Therefore, fixed exchange rates are
the wrong solution.
At the time of the original publication, Mr. North was
a member of the staff of the Foundation for Economic Education.
1 Paul Einzig, The Case Against Floating Exchanges (New
York: Macmillan, 1970). Einzig's weekly column in The Commercial and
Financial Chronicle includes an attack on floating exchange rates at
least once a month. Cf. Brochure, Committee on Monetary Research and
Education, Inc. (1971), pp. 9-10.
2 Business Week (September 25,1971), pp. 91 ff.
3 On exported inflation, see Wilhelm Roepke, "The
Dollar as Seen from Geneva," National Review (March 8, 1966); Against
the Tide (Chicago: Regnery, 1969), ch. 13: "The Dilemma of Imported
Inflation."
4 Against the Tide, p. 229.
5 Ibid., p. 230.
6 Ludwig von Mises, Human Action (3rd rev. ed.;
Chicago: Regnery, 1966), pp. 476-78.
7 Cf. Gary North, "Statist Bureaucracy in the Modern
Economy," THE FREEMAN (January, 1970); Mises, Bureaucracy (New Rochelle,
New York: Arlington House, [1944] 1969); North, "The Mythology of
Spaceship Edrth," THE FREEMAN (November, 1969). On the nature of
knowledge and the market's division of labor, see F. A. Hayek,
Individualism and Economic Order (University of Chicago Press, 1948),
ch. 2.
8 Alfred L. Malabre, Jr., "Is It Really Time for
Monetary Cheer?" Wall Street Journal (December 2, 1971). Malabre's
estimate of the number of devaluations is far too low. Franz Pick, in
the introduction to the second edition of All the Monies of the World
(1971), reports that at least 418 partial or full devaluations took
place in 108 countries between 1954 and the end of 1970. 1971 saw an
additional 99 devaluations: Barron's (January 3, 1972), p. 9. This, in
spite of the so-called stabilizing influences of the International
Monetary Fund, the organization drawn up at the Bretton Woods Conference
in July, 1944, officially established on December 27, 1945, and put into
operation on March 1, 1947.
9 Mises, Human Action, p. 791.
10 Ibid., p. 800.
11 The Theory of Money and Credit (Foundation for
Economic Education, 1971), pp. 180-81.
12 Human Action, p. 455.
13 Ibid., pp. 455-56.
14 Ibid., p. 801.
15 Ibid., pp. 464-66.
16 Ibid. (1949 ed.), p. 462n.
17 Karl Marx, Capital (New York: Modern Library), p.
391. This is the first volume of Capital. He continued this same
argument in Vol. 3 (Chicago: Charles H. Kerr, 1909), pp. 673, 1027.
Frederich Engels, Herr Eugen Duering's Revolution in Science
[Anti-Duering] (London: Lawrence & Wishart, [18771 1934), pp.
296-301. For a critique of this concept of capitalist contradiction, see
Gary North, Marx's Religion of Revolution (Nutley' New Jersey: Craig
Press, 1968), p. 154.
18 Mises, Human Action, pp. 289 ff. Cf. Frank H.
Knight, Risk, Uncertainty and Profit (New York: Harper Torchbook, [1921]
1965), pt. 3.
19 Mises, "Economic Calculation in the Socialist
Commonwealth," (1920), in F. A. Hayek (ed.), Collectivist Economic
Planning (London: Routledge & Kegan Paul, [1935] 1963). Cf. Mises,
Socialism (New Haven, Conn.: Yale University Press, [1922] 1962), pp.
119-62; T. J. B. Hoff, Economic Calculation in the Socialist Society
(London: Hodge, 1949). For an able refutation of the myth that Oskar
Lange in some way "refuted" Mises on this point, see Paul Craig Roberts,
"Oskar Lange's Theory of Socialist Planning," The Journal of Political
Economy, LXXIX (1971), pp. 562-77. Roberts is not really happy with
Mises' original formulation of his critique, however.
20 Mises, Human Action, ch. 20. Cf. Gary North,
"Repressed Depression," THE FREEMAN (April, 1969); North, "Downward
Price Flexibility and Economic Growth," THE FREEMAN (May, 1971).
21 Leonard E. Read, Talking to Myself (Foundation for
Economic Education, 1970),ch.6.
22 Murray N. Rothbard, "The Case for a 100 Per Cent
Gold Dollar," in Leland B. Yeager (ed.), In Search of a Monetary
Constitution (Cambridge, Mass.: Harvard University Press, 1962), pp.
100-01.
23 Mises, Theory of Money and Credit, p. 240. Cf.
North, "Donward Price Flexibility," pp. 312-13.
24 I must admit that the passage in Mises' Theory of
Money and Credit, "Currency Reform in Ruritania," does not seem to
conform to every other statement written by Mises with regard to the
political control of prices, including rates of exchange. He calls for a
state agency to set a legal parity and "to make this legal parity an
effective real market rate ...... (p. 445). The meaning of this obscure
passage is best understood in terms of his attack on statist
foreign-exchange policy which appears on pp. 18-19. The whole corpus of
Mises' writings is opposed to price controls; a single deviation - if,
indeed, it is a deviation - should not be used to compromise the impact
of his overall defense of the free market.
Reprinted with permission from The
Freeman, a publication of The Foundation for Economic Education, Inc.,
March, 1972, Vol. 22, No. 3.
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