TO THE intelligent American, troubled and worried about the future buying power of his salary, wages, income, or life insurance, "Foreign Exchange" is just another one of the financial phrases appearing in the perpetual crossword puzzle that confronts him every morning in the business section of his newspaper. In the course of the past few years, however, he has learned to his sorrow that the phrase is not always a harmless one. He has often seen breath-taking rises and sickening declines in his own wholly domestic business ascribed by his favorite financial commentator to the "weakness of the franc" or a "rise in the price of gold in London." Quite naturally, therefore, Americans in every economic field have expressed the wish that those in authority in the various countries would get together and agree on something to put an end to these mysterious and unnecessary shifts in the economic weather.

In response to this growing plea for fewer hurricanes over the financial seas, many plausible suggestions, plans, and formulas have been offered. A great deal of loose talk has been heard about "stabilizing the exchanges." Every few days we read that still another after-dinner speaker has said that if only we would stabilize the exchanges we could have fair weather sailing, international trade would flow freely again, and our domestic economy would flourish.

For the past eighteen years I have been one of the group of American business men actively engaged in foreign trade. During this trying time we American foreign traders have had many headaches. We have butted into the bruising wall of exchange embargoes, restrictions, and fluctuations. We have spent countless hours gazing into the crystal ball, to determine, if we could, some faint outline of an international monetary pattern that would enable us to avoid huge exchange losses. We have had intimate and practical experience with all of the various currency experiments that have been tried in that period: the flight of the German mark and the Central European currencies; the Belgian and French devaluations; the English move to a Free Gold Market; the Australian and New Zealand discounts on their own currency against sterling; the monetary experiments of the South American countries; the Tripartite Agreement; the subsequent devaluation of the franc; and, to make the roster complete, the devaluation of the dollar. The contrast between the high hopes and assurances which accompanied every one of these moves, and, in the main, the disappointing outcome of most of them, give me courage to say a few homely words out of the depths of my firsthand experience. Perhaps by this means I can help some of my fellow Americans to separate a few truths from the tripe they hear talked about the international monetary situation.


During the postwar years of struggle to set our economic world reasonably straight again, the laurels have continually been won by the coiners of new economic phrases and slogans, the generators of pseudo-technical economic terms and manœuvres. Highly entertaining and amusing! -- but tragic, too, when we review the gigantic economic blunders of these years and when we realize that the phrase-makers again are distracting our attention with toy balloons labelled "Stabilizing the Exchanges," "Sterilized Gold," "International Equilibrium," and "Stabilized Purchasing Power."

Governments themselves seem determined to escape from the classical, inevitable, and eternal economic verities. In country after country, political groups in control of government have been fascinated by plausible economic fallacies. No attention is paid to the point that the particular economic experiment about to be tried has been tried five, ten or fifteen years ago -- or five, ten or fifteen centuries ago -- in some country similarly eager to find the royal road to prosperity; and that such experiments, based on false economic premises, have come, time after time, to a bad end.

For the man working in the field of international trade and finance these fallacies have produced a nightmare. They come into violent collision with the realities. Prominent among the fallacies to which I refer are the following:

First, it is presumed that the big thing wrong with international trade is the lack of stable exchange rates. This is like saying that the big thing wrong with a man who has the plague is his high temperature. The high temperature is only a symptom. Lack of stable exchange rates is a symptom, too. The "plague" of international trade is the disease called "economic nationalism."

Second, it is presumed that the exchange rates of two paper monies can be stabilized without first stabilizing each paper money in terms of gold.

Third, it is presumed that a paper money can be evaluated by offering to buy gold in terms of that money. Actually, it is the government's readiness to exchange gold for the paper money -- the offer to redeem its currency and bonds in terms of gold -- that evaluates the paper money.


All of the mistaken theories and presumptions with regard to currency and exchange have one thing in common: they represent a flight from the realities of gold and gold prices. The experience I have had in coping with those realities in many countries over a period of years can be boiled down to a summary which is brief but I hope significant:

(1) No country has ever gone off gold or ever does go off gold actually. It may go off gold contractually; that is, it may refuse to redeem its paper currency in gold, but this does not change in the slightest degree the fundamental attitude of the government or its citizens toward the attractive qualities of gold itself. Whether a nation is "on gold" or "off gold," it is a very significant fact that gold always has been, and still is, the common denominator of all international exchange transactions. In other words, gold is the medium of exchange among paper monies.

(2) The real prices of world commodities -- wheat, cotton, copper, oil, etc. -- are gold prices. These prices are still governed by the world supply and demand for gold and by the world supply and demand for the individual commodities. Internal paper prices of these world commodities in any country are a by-product of the world prices: they are determined automatically from world prices by the gold value of that particular country's paper money.

(3) The rate of exchange between the paper monies of any two countries can be stabilized only when each country's paper money is stabilized in terms of gold. Equalization funds can "peg" cross-rates over comparatively short periods of time and within certain narrow limits, but the exchange rates of two paper monies cannot actually be kept stable unless each paper money itself is kept stable in terms of gold.

(4) It is futile to discuss international agreements for the stabilization of exchange rates of paper money until such time as the stress can be taken off gold for the discharge of international obligations. This stress can be relieved only by making it possible to discharge the obligations more freely in goods or services. In other words, when we begin to convalesce from the disease of economic nationalism, when goods again are as "good as gold" for paying debts, then, and only then, shall we find it possible to keep the exchange rates stable.

(5) When goods move freely again across international boundaries, when national budgets are balanced, and when internal price levels are brought into equilibrium by fighting rising industrial costs, then, and only then, can paper monies be stabilized in terms of gold. And only when paper monies are stable in terms of gold can they be stabilized in terms of one another.


Every country issues paper money, and this paper money has a certain current value represented by the amount of gold it will buy. The value may be fixed by statute, as it is in Belgium; it may be fixed between statutory limits, as in France and the United States; or it may be established through an "open market," as in England. The value of one currency in terms of another, that is, the exchange rate between these currencies, is determined by the relative amount of the respective currencies required to purchase identical quantities of gold.

It is, invariably, this price for gold, as representative of the internal value of each national currency, that determines the cross rates of international exchange, and the transaction is worked out each day on the basis of the old axiom that two things equal to the same thing are equal to each other. Thus it might be said that the rate of exchange between the paper monies of two countries is only an x/y expression of the value of the respective paper monies in terms of gold.

In our earliest lessons in algebra we learned that to determine the value of the relation x/y we must determine first the value of x and then the value of y. In international exchange markets, the rate of exchange between the paper currencies -- for example, between the paper pound and the paper dollar -- is determined from day to day by the law of supply and demand as it acts and reacts on these paper currencies and on gold.

Every day the international markets appraise the value of the English pound in grains of gold. Let us call this quantity x. It should be borne in mind that in England the pound is "off gold" contractually, i.e., England is not redeeming its paper currency freely at a fixed value in gold. The supply and demand for the paper pound and the supply and demand for gold, therefore, determine daily the value of the paper pound in grains of gold.

The value of the American dollar, which we can call y, in grains of gold, is established by the prevailing price of $35 an ounce, or approximately 14 grains of fine gold per dollar.

Accordingly, the rate of exchange between pounds and dollars -- i.e., the relation x/y -- is determined automatically in the international markets simply by dividing the number of grains of gold that an English pound is worth by the number of grains of gold that an American dollar is worth. For example, if the markets on a particular day express the English pound as being worth 70 grains of gold, then the exchange rate automatically expresses itself in our x/y ratio as the ratio 70 to 14, or 5 to 1. Under these conditions, the English pound is said to be selling at five dollars.

If, in the above example, instead of England we had chosen for comparison with the dollar some country whose currency had a fixed statutory price in grains of gold, the basic exchange rate between such a country and the United States would be the relationship between the two respective fixed parities. Actually, the day-to-day cross-rates would vary only slightly from this "par of exchange" as long as both countries were willing and able to redeem their own currency abroad in gold at the statutory par whenever conditions required such action.


In current discourses on our monetary problems the expressions "Stabilized Exchanges" and "Stabilized Currency" are used loosely, interchangeably, and often as though they meant the same thing. No distinction is made between the horse and the cart, and most often the cart is put before the horse. It is erroneously presumed that stabilizing the exchanges can have an important effect on stabilizing the currencies. What I want to emphasize is that only stabilized currencies, in terms of gold, can provide the bases for stabilized exchange rates.

Accordingly, I should like to suggest to government officials throughout the world, and to the officials of my own country in particular, that stabilization, like charity, should begin at home.

Again, as an American foreign trader, I should like to say frankly to my friends in Washington that our foreign trade needs no monetary measures designed peculiarly as an aid to foreign trade -- no wooden shoes designed peculiarly for outdoor wear. The competing devaluations of foreign currencies can safely be ignored and our monetary policy based firmly on whatever is good for our own domestic economy.

The threat of foreign currency "competition" is, in any event, greatly exaggerated. Even if the dollar were to be tied to gold today, boldly and arbitrarily, the dangers alleged from further devaluations abroad should not concern us. We might, indeed, make a bad mistake in pegging the price of gold at some handpicked figure, but the consequence of that mistake would be far more serious in terms of its dislocation of our own domestic economy than because of any "under-cutting" of the franc or the pound that might develop.

Quite obviously, it is not the gold value of the franc or the pound sterling (or their equivalent exchange value) that is of importance to the American economy; it is the gold value of the dollar itself. If a penalty imposes itself on our domestic economy, or on our foreign trade, it is because the dollar is over-valued (or under-valued) per se, and not because the franc or the pound is under-valued (or over-valued) either internally or "in relation" to the dollar. In other words, if the need exists in any country for depreciating its currency (or appreciating it), it is a need that arises out of an internal price disequilibrium in that country, and not out of any "competitive" adjustment that some other country has taken in an effort to correct its internal disequilibrium. Again, like charity and ultimate stabilization, the need for price equilibrium through currency adjustment begins at home.

In short, American foreign trade does not need the help of a fearful weather-eye from Washington on competitive devaluations abroad. Further, our foreign trade can be helped far more by a stable dollar in terms of gold than by any supposedly expedient adjustments which might be made to stabilize the exchange rate of the dollar in terms of the paper currency of some other nation.


Now what can we suggest that the United States Government should do about this stabilization problem?

In the first place, we can ask for a vigorous continuance of the constructive efforts President Roosevelt and Secretary Hull are making to take the stress off gold as a medium for the settlement of international balances. The Administration's trade agreements program is designed to secure a freer flow of international trade throughout the world. This policy, which Mr. Hull has termed "enlightened nationalism," is a first vital step toward stability in the exchanges. Until goods can again move freely in foreign trade, the demands existing upon gold will make impossible any sound approach to exchange-rate stability.

Meanwhile, the Treasury should begin redeeming its currency and bonds in gold, not only to foreigners but to any American citizen. I cannot for the life of me see why my government should discriminate against me by refusing me the privilege of buying some gold with my government paper, when it is offering that privilege to foreigners. The unjust discrimination involved is the sort of thing that Samuel Adams and George Washington opposed so bitterly.

Furthermore, the finest kind of gold reserve that any country could have is a gold reserve held in the banks throughout the country and in the socks of its citizens. In the case of domestic emergency, this gold should be attracted into the national treasury by raising the offered price for it, and not by confiscation. This would provide not only a more democratic solution of the gold problem, but a sounder economic solution as well. I say "sounder economic solution" because I would far rather trust the integrated wisdom of these individual Americans in taking care of my country's gold reserve than I would a few government experts in Washington -- Democrats or Republicans. My fellow citizens' integrated decisions on whether to buy or sell gold might sound less brilliant than those coming out of Washington, but they would be wiser and surer.

Should the Treasury sell gold to American citizens or anybody else at $35 an ounce? I reply, without blasphemous intent, "God only knows!"

In the countless arguments to which I have listened during the past few years, as to whether the dollar is "over-valued" or "under-valued" at $35 an ounce for gold, I have not heard of one expert who has constructed a statistical approach to determine what the dollar really is worth in terms of gold. I must confess that I haven't the slightest idea myself whether the Treasury should redeem its paper at the rate of $35, or $20.67, or $30, or $40 per ounce of gold. Nor have I met anybody else who has the remotest idea of what the dollar is really worth.

Accordingly, I would suggest that an auction market be set up in New York by private banks or financial men (like the London gold auction market) and that the price be determined there daily by the law of supply and demand. In some reasonable time -- two or three years perhaps -- the price of gold in terms of the paper dollar would have settled down, or up, to some new normal to replace the rate of $20.67 per ounce which we abandoned as sub-normal, and the rate of $35 per ounce which we picked out of the air. When the new normal seemed to have established itself, we could fix the value of the paper dollar -- by fixing the buying and selling price for gold -- and let moderate fluctuations in the value of gold vis-à-vis government paper be taken care of thereafter by variations in the interest and discount rates in the money markets.

And, of course, our old friend the National Budget should be balanced. The IOUs of a careless, sloppy, profligate government are worthless. Anybody responsible for the treasury of a government who is confronted with an unbalanced budget is bound to find himself in hot water in his monetary manœuvres -- the same kind of hot water a private institution or individual gets into under similar conditions. In the case of our national government, however, the scale is different. When the situation gets out of hand, not just a few people or a few thousand people get hurt, but millions.

I think I can reasonably claim that in talking this way I am not acting like a frightened old maid. During the past eighteen years I have observed abroad, at first hand, a score of countries suffering from budget sickness, and I have traveled extensively among their peoples, who were compelled to endure the economic misery that developed as the result of depreciated currencies and skyrocketing prices.

Let the cross-rates of exchange go hang! Never mind about "stabilizing the exchanges." Let us work toward stabilization of the dollar in terms of gold and concern ourselves principally with the effect of such stability on our own domestic economy. It is true that gold fluctuates in value, but it is still a far better anchorage for our dollar than any of the foreign currencies.

Trying to stabilize the cross-rates of exchange with several of the countries abroad is only a pipe dream, for two obvious reasons:

First, no two of the countries will agree to peg their cross-rates with each other, because each country feels that its own domestic monetary problems, price levels, etc., are far more important than the cross-rate problem. Each country, therefore, wants to be free to make its internal adjustments, and to change the gold content of its currency, without being hampered by a cross-rate agreement. It has been difficult to keep two countries together; imagine the difficulty of getting three or four or five of them to keep the cross-rates of exchange pegged multilaterally!

Second, government officials abroad do not want to peg the cross-rates of exchange. Who knows what the cross-rates should be? Any of the foreign officials who are frank enough to state their position openly will say that they do not know. They tell us, quite properly, that they would rather let the rates gravitate to the normals induced by internal economic conditions, by the flow of international trade, and by the movements of capital. In other words, they feel that the cross-rates of exchange should be established by the law of supply and demand, operating freely on the exchange markets. I think they are right.

The situation in which we find ourselves today demands that our Government should have a monetary policy based on a few simple truths. And our Government should be concerned principally with maintaining integrity in the relationship between the Treasury and the American citizen. Further, our policy should be published in some form that can be understood by a reasonably studious American. I burn the midnight oil, but I cannot understand the monetary policy of the United States Government at the present time. Can you?

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