The Online Library of Liberty

A project of Liberty Fund, Inc.

• Foreword
• Author’s Preface
• Interventionism
• Introduction
• 1.: The Problem
• 2.: Capitalism Or Market Economy
• 3.: The Socialist Economy
• 4.: The Capitalist State and the Socialist State
• 5.: The Interventionist State
• 6.: The Plea For Moral Reform
• I.: Interference By Restriction
• 1.: The Nature of Restrictive Measures
• 2.: Costs and Benefits of Restrictive Measures
• 3.: The Restrictive Measure As a Privilege
• 4.: Restrictive Measures As Expenditures
• II.: Interference By Price Control
• 1.: The Alternative: Statutory Law Versus Economic Law
• 2.: The Reaction of the Market
• 3.: Minimum Wages and Unemployment
• 4.: The Political Consequences of Unemployment
• III.: Inflation and Credit Expansion
• 1.: Inflation
• 2.: Credit Expansion
• 3.: Foreign Exchange Control
• 4.: The Flight of Capital and the Problem of “hot Money”
• IV.: Confiscation and Subsidies
• 1.: Confiscation
• 2.: The Procurement of Funds For Public Expenditure
• 3.: Unprofitable Public Works and Subsidies
• 4.: “altruistic” Entrepreneurship
• V.: Corporativism and Syndicalism
• 1.: Corporativism
• 2.: Syndicalism
• VI.: War Economy
• 1.: War and the Market Economy
• 2.: Total War and War Socialism
• 3.: Market Economy and National Defense
• VII.: The Economic, Social, and Political Consequences of Interventionism
• 1.: The Economic Consequences
• 2.: Parliamentary Government and Interventionism
• 3.: Freedom and the Economic System
• 4.: The Great Delusion
• 5.: The Source of Hitler’s Success
• VIII.: Conclusions
• Reading References

3.

Foreign Exchange Control

An attempt by government forcibly to give the national credit money or paper money a value higher than its market price causes effects which Gresham’s Law describes. A condition results which generally is called a shortage of foreign exchange. This expression is misleading. Anyone who offers less than the market price for any good is unable to buy it; this holds true for foreign exchange just as much as for all other goods.

It is an essential characteristic of an economic good that it is not so abundant that it can satisfy all desired uses. A good of which in this sense there would not be a shortage would be a free good. As money is necessarily an economic good, not a free good, money of which there would not be a shortage is inconceivable. The governments, which adopt an inflationary policy but at the same time pretend that they have not lowered the purchasing power of the domestic money, have something else in mind when they complain about a shortage of foreign exchange. Were the government to refrain from any further action once it had increased the quantity of the domestic money by inflation, the value of the domestic money would fall relative to metallic money and foreign exchange and its purchasing power would decline. However, there would not be a “shortage” of metallic money and foreign exchange. Those who were ready to pay the market price would obtain for their domestic money any desired amount of metallic money or foreign exchange. Those who buy goods have to pay the market price given by the exchange rate of the market; they either have to pay in metallic money (or foreign exchange) or pay that amount of domestic money which is determined by the market rate for foreign exchange.

But the government is unwilling to accept these consequences. Being sovereign it believes itself omnipotent. It can issue penal laws; it has courts and police, gallows and jails at its disposal and can destroy anyone who rebels. Consequently, it orders that prices are not to rise. On the one hand, the government prints additional money, enters the market with it, and thus creates an additional demand for goods. On the other hand it orders that prices should not rise, because government thinks it can do anything at will.

We have already dealt with the attempts to fix the prices of goods and services. Now we have to consider the attempts to fix the rates of foreign exchange.

The government places the blame for the rise of foreign exchange rates on the unfavorable balance of payments and on speculation. Being unwilling to abandon the price fixing for foreign exchange, it takes measures to reduce the demand. Foreign exchange is to be bought only by those who require it for a purpose of which the government approves. Goods, the importation of which the government considers superfluous, should not be imported any longer; interest and amortization payments to foreign creditors are to be discontinued; citizens are not to travel abroad. The government fails to realize that its efforts to “improve” the balance of payments are futile. If less is imported, less can be exported. Citizens who spend less on trips abroad, imported goods, and interest and repayment of foreign loans will not use the unspent money to increase their ready cash; they will spend it within the country and thus raise prices in the domestic market. Because prices rise, because citizens buy more within the country, less will be exported. Prices rise not only because imports have become more expensive in terms of domestic money; they rise because the quantity of money was increased and because the citizens display a greater demand for domestic goods.

The government believes that it can accomplish its purpose by nationalizing dealing in foreign exchange. Those who receive foreign exchange—from export transactions, for instance—must by law deliver it to the government and receive in exchange only the amount of domestic money which corresponds to the foreign exchange price which has been fixed by the government below the market price. Were this principle to be enforced consistently, exports would cease entirely. As the government does not want this effect it finally has to give in. It grants subsidies to the export trade intended to compensate for losses which the exporters suffer by the obligation to turn over to the government at the fixed price the foreign exchange they receive.

On the other hand the government sells foreign exchange to those who want to use it for purposes which meet with the approval of the government. Were the government to adhere to its fiction and to demand only the official price for this foreign exchange this would amount to subsidizing the importers (not the import trade). As this is not intended by the government, compensation is sought, for instance, by a proportionate raising of import duties or by imposing special taxes on the profits and transactions of the importers.

Control of foreign exchange means the nationalization of foreign trade and of all business with foreign countries. It does not alter foreign exchange rates. Whether or not the government suppresses the publication of actual foreign exchange rates which reflect market conditions is immaterial. In foreign trade transactions only those rates are significant which reflect the purchasing power of domestic money.

The effects of such a nationalization of all economic relations with foreign countries on the life of the individual citizen are the more decisive the smaller the country and the more closely connected are its international economic relations. Foreign travel, attendance at foreign universities, and the reading of books and newspapers published abroad are only possible if the government places the necessary foreign exchange at the individual’s disposal. As a means of lowering the price of foreign exchange, the control is a complete failure. But it is an effective implement of dictatorship.