MY THEME is human folly. It is a theme so prolific and
inexhaustible that one wonders at the survival of a species incessantly
preoccupied with the assertion of absurdities, that is, with the denial
of salient facts about the environment in which it exists.
All nations have their own local and national nonsense;
but on none of these would I presume to address you. I am in a foreign
country. Decency, therefore, forbids me to expatiate upon the foibles of
Britain; and good manners debar me from referring to those of my hosts.
There is, however, no lack of material on that account, because you and
we and many other nations participate together in one and the same grand
nonsense, which is respectfully referred to as "the international
monetary system." This huge pyramid or Tower of Babel is constructed
upon a simple but perfectly adequate foundation. This is the assertion
that the values of the different national currency units in terms of one
another and of ounces of pure gold ought not to vary from month to month
or from year to year or even from decade to decade - at least, unless
they are altered by a committee decision among the nations. It is
similar to, and as absurd as, asserting that all the prices of stocks
and shares are to remain unaltered unless and until this one or that is
revised by the Stock Exchange Commission.
I will not detain you by arguing, what is obvious, that
neither in the one case nor the other will the prices ever be right -
except, by some remote chance, for an instant of time. Apart from this
extreme exception, they are all bound to be more or less wrong, in one
direction or the other, all the time. Of course, if the various national
currencies were gold, chopped into bits of different sizes, or gold
represented by pieces of paper which could instantly and unconditionally
be exchanged for a specified bit of gold, then indeed their respective
values in terms of one another would be, if so desired, immutable,
because they would all be one and the same stuff.
This used, until just after I was born, to be the case;
and the memory like the memory of so much else prewar (which to me means
"pre-World War I) still haunts mankind and is part of the etiology of
the collective aberration I am discussing. This was specially plain when
we in Britain plunged into it in 1925 by what was miscalled "going back
onto gold." After a decade of war and confusion, at last the blessed,
the magic, the prewar equation of £3:17:10½ sterling with an ounce of
fine gold occurred in the market. It was a nostalgic moment, and small
wonder if we tried to grapple it to ourselves forever, saying, like
Faust to the passing hour: "Oh, tarry yet; thou art so fair."
Within six or seven years the decision was found to be
unsustainable and presently it became widely accepted that it had also
been inherently wrong and one of the causes of the depression into which
we and other countries descended around 1930 and from which some
recovery was perceptible after 1931. It is one of the ironies of our age
that those who wholeheartedly accepted this view hastened to
re-establish the system of 1925 again after 1944 and have maintained it
pertinaciously ever since, explaining that all that was wrong in 1925
was the particular figure chosen to be fixed.
$35 an Ounce
You in the United States still live under the influence
of a similar popular emotion. Having once asserted, thirty-five years
ago, that the price of fine gold was $35 an ounce, you have persisted in
that assertion as though the mere repetition could make and keep it
true. There is an enormously deep human yearning - which finds
multifarious religious expression - for something changeless and eternal
to which to cling: "O Thou that changest not, abide with me."
Here was an equation, closely allied with the concept
of the nation itself, something around which in any case the human
instinct for survival and diuturnity strongly centers - the equation
between a piece of gold and a dollar bill, the very symbol of America.
Surely its permanence could be asserted and, being asserted, be secured?
Once again, if and so long as that dollar bill was instantly and
unconditionally exchangeable with gold, the statement would be a truism
and therefore true; but when it ceased to be so exchangeable, there was
no reason why, except for a brief chance moment, the price of gold in
terms of dollars or of dollars in terms of gold, should remain at any
particular figure: the conditions of supply and demand, of production
and desirability, of the two things having no specific and necessary
relationship. Yet, to maintain the assertion, you have more than half
emptied Fort Knox and spun a web of controls and compulsions around
American citizens.
Trapped by Error
So here are our two nations, along with others, making
assertions about the respective values of our domestic currencies which
are manifestly untrue, and assertions about the stability or permanence
of those respective values which are manifestly absurd. Yet to these
assertions we are committed by dint of habit and repetition and the most
solemn and repeated asseveration.
This is no new phenomenon. Indeed, as I have suggested,
one form or another of it is perfectly normal. Consequently, we have
ample experience from which to predict with assurance how people will
react in order to defend and shore up the untruth and absurdity,
because, of course, being untrue and absurd, it is always threatening to
collapse. One reaction - I will not dilate on it at any length - is to
shout at anyone who points out the untruth or absurdity, to drive him
away with stones and curses, and, in primitive times, if possible to
kill him. Those who in recent years have been so bold as to talk in
public about a floating pound or a market price for gold will be
personally familiar with this kind of treatment.
The next reaction is to invent a range of imaginary
terrors depicting what would happen if the untruth or absurdity were
abandoned. This may, psychologically, be an attempt to frighten oneself
out of thinking, and is perhaps close kin to those medieval elaborations
of the horrific torments which awaited those who questioned the dogmas
of ecclesiastical authority. These superstitious fears are, I believe,
worth extensive and patient examination, because they illustrate one of
the great dangers to freedom, whether it be freedom of thought and
speech, or of trade and economic decision. This is that, once freedom
has been lost, it can so easily be made to appear impracticable, and
indeed chimerical.
Unfounded Fears
As soon as the price of an article is controlled, men
are soon persuaded that unless it were controlled, the article would be
unobtainable: if food prices were decontrolled, they imagine they would
starve; if house rents were freed, they imagine they would perish of
exposure. Thus the loss of a freedom becomes self-perpetuating through
fear of the unknown, and habit soon teaches men to believe there is no
alternative to the state in which they find themselves. This is cognate
with the awkward fact that while the effect of control is easy to argue
- "if the government fixes the price, then that is the price which will
apply" - the practicability and superiority of freedom are in the last
resort demonstrable only experimentally, by experience.
We know that men can walk erect on two legs, because in
fact they do; but if we had been kept for long enough on all fours, we
should treat with skepticism and ridicule any bold spirit who suggested
that it would be much easier and simpler to walk about. We should have
become convinced that any such dangerous and unproven experiment would
speedily result in broken noses or cracked skulls.
The terrors with which imagination has invested the
simple notion that gold and the various national currencies should be
allowed to price themselves, like anything else, in the market and that
all the contortions and controls designed to fix their respective prices
are futile and harmful, find close parallels wherever the market has
been distorted or destroyed. Hence, in examining the superstitious fears
attendant on the preservation of "the international monetary system," we
are confronting the same imaginary monsters as bar the road to every
freedom.
I take the first. "We should be plunged into
uncertainty, and never know the exchange rates from one day to the
next." This is the cry of the prisoner of the Bastille, who pitifully
longed for the security of his confinement. He, however, did at least
get regular meals and live in the same old cell. The irony today is that
the very people who express this fear never know at present a moment's
freedom from anxiety. Day by day the headlines scream at them about
impending devaluation, or revaluation, or some other abrupt and
disagreeable contingency. The pains they dread are those with which they
are already suffering - but in a specially acute form, for one more
uncertainty and unknown is added to all those which exist anyhow:
namely, the uncertainty as to whether, when, and how the arbitrary fixed
price will be altered.
An Added Uncertainty
There is no uncertainty in this world quite so great as
the uncertainty about what a government is going to do next. These
uncertainties already have to be taken into account in every transaction
in which the future exchange value of currencies is a factor. In the
jargon, only "spot" is fixed while "forward" varies from day to day,
reflecting as best it can the opinions which those concerned hold about
the future.
The moral is this. We do not banish change and
uncertainty by pretending, or asserting, that they do not exist. We
thereby only make them even harder to anticipate and to guard against. A
premium has always to be paid to insure against the unknown. That
premium will be higher if the unknown includes the actions and decisions
of politicians and if trends and changes in the real world are not
constantly being reflected, genuinely and freely, by changing market
prices. What a terrifying position it would be if the spot prices on the
Stock Exchange were pegged - and incidentally, therefore, rigged and
subsidized by the controlling authorities - while only the futures were
allowed to move.
I have disposed, just now, incidentally of the argument
that international trade would be inhibited by a higher cost of
insurance against currency risks, by pointing out that the opposite
would in fact be expected. I pause only to note that this argument is a
special form of the general claim that control is economical and
minimizes costs by substituting certainty for uncertainty - a
proposition which any person or trade with practical experience of state
control finds highly satirical. The actual effect is to replace
continuous adjustment by large, jerky, and belated concessions to a
reality it is no longer possible to deny or defy - in this context, the
sudden, long-anticipated but long-delayed jolts of devaluation and
revaluation.
Planned Chaos vs. Freedom
Sometimes, however, it is simply stated as self
-evident that the growth of world trade would suffer if the respective
currencies and gold were continuously priced against one another in the
market. This is a recognizable variant of the well-known "chaos"
superstition, whereby the operation of the market in any area is
described as "chaotic," immediately creating by this metaphor the
impression that the movement of individuals and their relations with one
another are impeded. We are so familiar with such terms as "traffic
chaos," "administrative chaos," "chaos and dark night," that the mere
mention of the word is sufficient not merely to suspend judgment but to
neutralize experience.
People who are perfectly and daily familiar with the
market where it exists -in the shopping center, for example, or on the
stock exchanges - will instantly persuade themselves wherever they are
not accustomed to it that it would produce "chaos." This impression is
reinforced by the application of the solemn and impressive term "system"
to the opposite. It is wonderful what can be achieved by giving to the,
truly chaotic, behavior of national governments in the last twenty years
the title of "the international monetary system," and describing as "a
threatened collapse of the system into monetary chaos" the prospect of
those governments being forced to recognize the true respective values
of their currencies,
The "system" - to call it for once by its nickname -
incidentally necessitates, and has in fact always necessitated, the
repeated and abrupt interference of governments in the trade and
investment of their subjects, internal and external: changes of
taxation, import controls, import deposits, import surcharges,
alterations of interest rates, prohibitions on loans. To be able
seriously to argue that such a system is actually favorable to
international trade is striking evidence of the depth to which
superstition has penetrated. The fear of the unknown like all fear
renders its victims irrational and blind to their surroundings.
The Course of Trade
Another superstitious fear - we may be more familiar
with this in Britain than you are here - is that if the exchange rate of
a country's currency were to fall, it would be unable to buy the raw
materials for its industries or even the food which it needs. This is a
particular version of the general cry in defense of control: "if it were
not there, we should starve."
There is, of course, absolutely no rational basis for
this fear. If a given number of British products of a certain kind
exchange for a given amount of raw material or finished goods in
Brussels or Buenos Aires or New York on one day, so they do the next
day, irrespective of any alteration overnight in the exchange value of
sterling. The supply and demand equation in Brussels or Buenos Aires or
New York is unaffected by the number of pounds the exporter gets for his
francs or pesos or dollars when he changes them to come home, or by the
number of pounds the importer has to find to buy the goods in francs or
pesos or dollars. The realities are unaltered: the same volume of
British goods and services exchanges in the outside world for the same
volume of foreign goods and services. In other words, our ability to buy
what we want from abroad is unaffected: our standard of living remains
absolutely unchanged.
What would happen is that if the exchange rate fell,
and consequently importers had to find more pounds while exporters
earned more pounds, there would be a shift-ever so slight, but enough
and just enough to produce a balance without borrowing - away from
imports and toward exports. The shift would be so slight as to be
imperceptibleless, at the moment, than one per cent of the national
product or much less than the gain which we make year by year in
production - and the shift in jobs would, of course, be even smaller
still.
This tiny margin is the sole extent to which Britain's
standard of living is being, even temporarily, maintained by the rest of
the world: it is a margin so narrow that the economic growth even of a
single average year is sufficient to swamp it. Yet, it is the only basis
for the accusation which the British positively enjoy leveling against
themselves, that they "imagine the rest of the world owes them a
living."
"Balance of Payments"
Another common but equally irrational fear that
prevails in countries which, under a system of fixed parities,
inevitably have what is called "a deficit on the balance of payments,"
is that if the current parity were not artificially maintained but were
to be replaced by a free and therefore fluctuating and at first
presumably lower valuation, foreigners would, as the phrase goes, "take
their capital out." The victims of this delusion imagine, as many of us
do in Britain, that they would thereby be impoverished, like a village
which has been pillaged by a horde of marauders.
In the first place, no productive capital, whoever it
belongs to, can be shipped abroad - these assets are, as you might say,
landlord's fixtures, and the refineries, retorts, and furnaces are there
to stay. The most that a foreigner who holds shares in them can do is to
try to find somebody to buy the shares from him for cash, and then
exchange the cash for foreign currency. The capacity of the country to
produce goods and services remains the same.
Let us, however, follow through what would happen. To
the extent that foreigners decide to exchange their shares, or other
interest-bearing securities, for the cash of the country, the demand for
cash is increased and for shares and securities is lowered. In other
words, the prices of the shares and securities fall, and the interest
obtainable on them - or the reward for surrendering one's cash in
exchange for them - correspondingly increases. When the foreigners,
having realized their securities, proceed to convert them into other
currencies, to that extent they drive down the rate of exchange of the
currency out of which they are getting in favor of those into which they
are getting; and thus, in effect, they obtain a lower rate of return on
their money - or suffer a loss of value, whichever way you like to look
at it - in the new situation compared with the old. Thus, the more
foreigners "take their money out," the more the inducements not to do so
mount up, in the form of higher rewards for staying and severer
penalties on going. It is a sobering experience which, even with fixed
parities, has befallen a number of investors in Britain in recent years.
So the fear of a "rush of money out of the country" is
pure bogeyman. I have spelled it out in terms of the foreign holder; but
obviously the same logic applies to one's own nationals. By all means,
if they like to exchange their assets for cash and then convert and
invest it abroad, good luck to them! They take the consequences, but
none of the rest of us suffers. If internal interest rates rise somewhat
in consequence, that is nothing to the rise in rates which we have
actually suffered in the effort to "keep up with the Joneses." In
itself, a fall in the rate of exchange neither harms nor impoverishes a
country. Indeed, there is no such thing as a "high" exchange rate or a
"low" exchange rate, but only a "right" exchange rate and a "wrong"
exchange rate.
Projecting a Trend
Then comes another "but," introducing another
superstitious fear. "But if we let the exchange rate go free, it may
fall and fall and never stop." This is, in fact, a very common argument
against the market in any area where it does not already prevail: if
prices are free to rise, they will go on rising forever; or
alternatively, if prices are free to fall, they will go on falling
forever. It is, of course, nonsense, but none the less dangerous for
that. This is why, when food prices were controlled, people feared they
would skyrocket otherwise: so long as the price of an egg is controlled
at 6 pence, you cannot prove that this does not prevent it from rising
to one shilling, or two shillings or any figure you care to name. When
the pound is pegged at $2.40, there are people who come to you, serious,
educated adults, and say that if it were free, it would fall to $1.00.
It is their version of the two-shilling egg. One retort, as above, is:
"Well; and if so, what of it?" But another, perhaps more suitable for
the weaker brethren, is: "No, it wouldn't; because if the discrepancy
between the fixed price and the free price were anything like that,
nothing on earth under our sort of conditions - not even a combination
of central bankers - would be able to maintain the present fixed price
for any length of time." But all this illustrates once again the force
of the superstitious fear of the unknown.
Inflation Jitters
My last group of superstitions centers around
inflation. We have been having a bad dose of these superstitions in
Britain lately, because it has paid the politicians to support (whether
knowingly or not) the myth that a fall in a country's exchange rate
automatically causes a general rise in prices. This served both as a
bogey to protect the absurdity of the fixed rate system, and also as a
blind to cover the causes of the higher prices which actually occurred
in the fiscal year 1968 when the pound sterling was devalued.
When a market exchange rate is substituted for a fixed
exchange rate, two things happen; the deficit (or surplus) - that is,
the loan to or from foreigners of a certain quantity of goods and
services - disappears; and secondly, relative prices alter internally so
as to accommodate that change. Other things being equal, the result
would be a general rise (or fall) in prices, the total of goods and
services available being that much less (or more). However, as I have
pointed out, the proportion was in our case minute and, in any event,
more than compensated for by the rise in domestic output. There would,
therefore, have been no general rise in prices if other factors had been
neutral.
After the change-over from a fixed to a market rate has
taken place, further changes in the rate will cause an alteration in
some internal prices relative to others if, but only if, there is a
change in the terms of trade; that is, if a given quantity of a nation's
goods and services exchanges for more or fewer than before in the
outside world. When this happens, there may also, but will not
necessarily, be a rise or fall in the gross national product in
consequence and thus, in the absence of other factors, a general fall or
rise in prices.
However, the principal context in which inflation
appears in this whole debate is the belief that fixed rates of exchange
are a safeguard against domestic inflation, and - according to taste -
either prevent the politicians from indulging in it or force them to
keep control upon it. There are three answers to this, at different
levels. One is that fixed rates of exchange demonstrably do not prevent
domestic inflation, and that there is no correlation between the
stability or otherwise of domestic prices in various countries and their
showing in deficit or surplus under the system of fixed exchange rates.
The second answer is one I am entitled to give with
confidence as a working politician: it is that if there were no such
thing as the balance of payments, if the country concerned were the only
inhabited land on the globe, the politicians would still be punished by
the electorate for indulging in more than a certain mild degree of
inflation. The true sanction on inflation, and the true penalty for
practicing it, is the effect on people of the defeat of expectations and
the shift of power from person to person, class to class, governed to
government, which it causes. That is what the politician has to answer
for when he meets his constituents.
But the third, and last, answer is a defiance. "If we
here want to inflate our currency, what business is it of any other
country, provided we do not try to insist on everybody else financing
us? That is, provided we accept the consequences in terms of truthful
exchange rates, it is part of our sovereign independence to do as we
will with our own domestic currency and to be as much, or as little,
pseudo-Keynesian as we please."
Finally, Common Sense and Reason Become Suspect
I conclude by confronting the last and most dangerous
of the demons which keep people imprisoned in the cage of control and
falsification, once the spring door has closed behind them. This is,
that common sense and reason themselves become suspect. "If you were
right," the prisoners protest, "we would have walked out of prison long
ago; if the bars were illusory, we should not then have all lain in
fetters so many years. What you say is too simple and obvious to be
true. Away with you; you are a false prophet." So the prisoners are made
to act as their own wardens, and the world has witnessed these last
twenty five years, if it would but look, the ironical spectacle of whole
nations wrestling with conundrums, commonly miscalled "economic
problems," which are the creation of their own persistence in absurd,
and manifestly absurd, practices.
How, then, if rational argument thus becomes
counterproductive, are the superstitions to be destroyed and the
imaginary prisoners liberated? Don Quixote turned sane on his death bed,
but that cure will not do. My own guess is that sooner or later, quite
accidentally and unpredictably, an inrush of reality occurs, against
which even the most entrenched superstitions and self-punishing
delusions are not proof, and the edifice of control and falsification
collapses, leaving the former victims out in the open, bewildered but
intact. That will be the moment, with encouraging and reassuring words,
to approach and say: "That's all right. There was nothing to be afraid
of all along. I told you so!" This uttered, it will only remain to turn
smartly away, and open the attack upon some ensuing folly.
From an address of May 19, 1969, before Trustees and
guests of The Foundation for Economic Education.
Reprinted with permission from The
Freeman, a publication of The Foundation for Economic Education, Inc.,
July 1969, Vol. 19, No. 8.
Yourname@libertyhaven.com
