Chinese Handwriting on the Wall

On March 1 the International Monetary Fund, with some 40 members, begins exchange operations. It could hardly start in less promising circumstances. Most of  the 40 nations have sent in the “par value” of their currencies. In very few cases do these official values at all correspond with the values as measured by black markets or free markets. The French franc is officially valued at 119 to the dollar; it has been selling on the outside market at 290 to the dollar. The Belgian franc, with an official value of 43 to the dollar, has been selling on the outside market at 60. The Dutch guilder, with an official value of 2.65 to the dollar, has been selling at 6.75. These are among the “stronger” currencies. The situation in Poland, the Balkans, Greece, and China is incomparably worse.

Yet the fund will buy the currencies of all member nations at par. This means that the relatively strong currencies—above all, the American dollar—will be forced to support the weak ones. It means that the United States will throw away further billions of dollars in buying foreign currencies far above their real values. This type of support by subsidizing the unsound policies of the governments that issue these currencies, postpones the day of reform. For the fund managers are given next to no power to insist on internal fiscal or economic reforms before they grant their credits.

Unfortunately the fund managers, instead of pointing to the dangers of this situation, have sought to rationalize it. “For practically all countries,” they said in a statement on Dec. 18, “exports are being limited mainly by difficulties of production or transport, and the wide gaps which exist in some countries between the cost of needed imports and the proceeds of exports would not be appreciably narrowed by changes in their currency parities.” This is not true. There would be a dramatic change in their trade balance if the currencies of these countries were allowed to sell at their real values. It is precisely because their currencies are ridiculously overvalued that the imports of these countries are overencouraged and their export industries cannot get started.

The current situation in China demonstrates how impotent the fund would be to correct any major decline in a currency. In recent weeks Chinese dollars have collapsed from an official quotation of 3,350 to one American dollar to 18,000 and more on the black market. Of the “stabilization” measures announced by the Chinese Government on Feb. 16 only those designed to reduce governmental expenditures and to increase revenues are likely to be effective. One of these is of outstanding importance. It provides for the public sale to private individuals or corporations, either directly or by the issuance of shares, of all government-operated enterprises except “those necessarily requiring government operation.” This proves that the road to Socialism is not, as usually supposed, necessarily a one-way street: A return to private enterprise is not merely possible, but simple.

But practically all the other measures announced by the Chinese Government—those seizing foreign assets of Chinese citizens, prohibiting private transactions in American dollars or dealings in gold, forbidding speculation and hoarding, and imposing price and wage ceilings all over again—must only make matters worse. Insofar as they are not evaded they must increase private fears and discourage trade and production. Yet, though exaggerated in extent, these Chinese measures are typical in principle of those now being taken by most countries to “stabilize” their currencies.

The steps by which China or any other country could permanently stabilize its currency would be far different. They would run somewhat as follows: (1) Reduce expenditures and increase revenues; balance the budget. (Engaged as it is in a civil war, this problem for China, however, is today obviously formidable.) (2) Announce that the volume of currency in circulation will not be increased beyond its existing amount. Keep the promise. (3) Remove internal price controls and all restrictions on trading in the currency. (4) Fix a provisional par value for the currency unit—but do not prohibit transactions above or below that value. (The fund agreement actually compels such a prohibition.) And finally, (5) provide for the ultimate conversion of that currency into a definite quantity of gold.

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