coal or sugar, they can satisfy this desire only if they can pay for them. If they want to import more, they must export more. If they cannot export more manufactured, or semi-manufactured, goods, they must export shares of stock, bonds, and titles to property of various kinds.
If the quantity of notes were not increased, then the prices of the items offered for sale would be lower. If they then demand more imported goods, the prices of these imported items must rise. Or else the rise in the prices of vital necessities must be offset by a decline in the prices of less vital articles, the purchase of which is restricted to permit the purchase of more necessities. Thus a general rise in prices is out of the question [without an increase in the quantity of notes]. The international payments would come into balance either with an increase in the export of dispensable goods or with the export of securities and similar items. It is only because the quantity of notes has been increased that they can maintain their imports at the higher exchange rates without increasing their exports. This is the only reason that the increase in the rate of exchange does not completely choke off imports and encourage exports until the “balance of payments” is once again “favorable.”4
Certainly no proof is needed to demonstrate that speculation is not responsible for the deterioration of the foreign exchange situation. The foreign exchange speculator tries to anticipate prospective fluctuations in rates. He may perhaps blunder. In that case he must pay for his mistakes. However, speculators can never maintain for any length of time a quotation which is not in accord with market ratios. Governments and politicians, who blame the deterioration of the currency on speculation, know this very well. If they thought differently with respect to future foreign exchange rates, they could speculate for the government’s account, against a rise and in anticipation of a decline. By this single act they could not only improve the foreign exchange rate, but also reap a handsome profit for the Treasury.
4. Foreign Exchange Regulations
The ancient Mercantilist fallacies paint a specter which we have no cause to fear. No people, not even the poorest, need abandon sound monetary policy. It is neither the poverty of the individual nor of the group, it is neither foreign indebtedness nor unfavorable conditions of production, that drives foreign exchange rates way up. Only inflation does this.
Consequently, every other means employed in the struggle against the rise in foreign exchange rates is useless. If the inflation continues, they will be ineffective. If there is no inflation, they are superfluous. The most significant of these other means is the prohibition or, at least, the restriction of the importation of certain goods which are considered dispensable, or at least not vitally necessary. The sums of money within the country which would have been spent for the purchase of these goods are now used for other purchases. Obviously, the only goods involved are those which would otherwise have been sold abroad. These goods are now bought by residents within the country at prices higher than those bid for them by foreigners. As a result, on the one side there is a decline in imports and thus in the demand for foreign exchange, while on the other side there is an equally large reduction in exports and thus also a decline in the supply of foreign exchange. Imports are paid for by exports, not with money as the superficial Neo-mercantilist doctrine still maintains.
If one really wants to check the demand for foreign exchange, then, to the extent that one wants to reduce imports, money must actually be taken away from the people—perhaps through taxes. This sum should be completely withdrawn from circulation, not even given out for government purposes, but rather destroyed. This means adopting a policy of deflation. Instead of restricting the importation of chocolate, wine and cigarettes, the sums people would have spent for these commodities must be taken away from them. The people would then either have to reduce their consumption of these or of some other commodities. In the former case [i.e., if the consumption of imported goods is reduced] less foreign exchange is sought. In the latter case [i.e., if the consumption of domestic articles declines] more goods are exported and thus more foreign exchange becomes available.
It is equally impossible to influence the foreign exchange market by prohibiting the hoarding of foreign moneys. If the people mistrust the reliability of the value of the notes, they will seek to invest a portion of their cash holdings in foreign money. If this is made impossible, then the people will either sell fewer commodities and stocks or they will buy more commodities, stocks, and the like. However, they will certainly not hold more domestic currency in place of foreign exchange. In any case, this behavior reduces total exports. The demand for foreign exchange for hoarding disappears and, at the same time, the supply of foreign exchange coming into the country in payment of exports declines. Incidentally, it may be mentioned that making it more difficult to amass foreign exchange hampers the accumulation of a reserve fund that could help the economy weather the critical time which immediately follows the collapse of a paper monetary standard. As a matter of fact, this policy could eventually lead to even more serious trouble.
It is entirely incomprehensible how the idea originates that making the export of one’s own notes more difficult is an appropriate method for reducing the foreign exchange rate. If fewer notes leave the country, then more commodities must be exported or fewer imported. The quotation for notes on exchange markets abroad does not depend on the greater or lesser supplies of notes available there. Rather, it depends on commodity prices. The fact that foreign speculators buy up notes and hoard them, leading to a speculative boom, is only likely to raise their quoted price. If the sums held by foreign speculators had remained within the country, the domestic commodity prices and, as a result, the “final rate” of foreign exchange would have been driven up still higher.
If inflation continues, neither foreign exchange regulations nor control of foreign exchange clearings can stop the depreciation of the monetary unit abroad.
Nowadays, the thesis is maintained that sound monetary relationships may certainly be worth striving for, but public policy is said to have other higher and more important goals. As serious an evil as inflation is, it is not considered the most serious. If it is a choice of protecting the homeland from enemies, feeding the starving and keeping the country from destruction, then let the currency go to rack and ruin. And if the German people must pay off a tremendous war debt, then the only way they can help themselves is through inflation.
This line of reasoning in favor of inflationism must be sharply distinguished from the old inflationist argument which actually approved of the economic consequences of continual monetary depreciation and considered inflationism a worthwhile political goal. According to the later doctrine, inflationism is still considered an evil although, under certain circumstances, a lesser evil. In its eyes, monetary depreciation is not considered the inevitable outcome of a certain pattern of economic conditions, as it is by adherents of the “balance of payments” doctrine discussed in the preceding section. Advocates of limited inflationism tacitly, if not openly, admit in their argumentation that paper money inflation, as well as the resulting monetary depreciation, is always a product of inflationist policy. However, they believe that a government may get into a situation in which it would be more advantageous to counter a greater evil with the lesser evil of inflationism.
The argument for limited inflationism is often stated so as to represent inflationism as a kind of a tax which is called for under certain conditions. In some situations it is considered more advantageous to cover government expenditures by issuing new notes, than by increasing the burden of taxes or borrowing money.
