The Freeman 1972 - The Ludwig von Mises Institute

172 THE FREEMAN MarchLenin said, treaties are made tobe broken.For a time, fixed exchange ratesseem to restrain policies of domesticmonetary inflation. But for howlong? Franz Pick's report lists devaluationsevery year, and thereare a lot of them. They are internationalviolations of contractviolationsthat call into questionthe whole structure of internationaltrade. The honoring of contractsis the very foundation offree exchange. Apart from this,economic prediction becomes exceedinglydifficult and productivitysuffers. Thus writes Alfred Malabre:International currency exchangescan transpire in various ways. Oneis through a system where CurrencyA can indefinitely be exchanged at afixed rate for Currency B. This is thesystem that allegedly prevailedthrough most of the post-World WarII era and to which most Westernleaders now wish to return. Ideally,it's a magnificent system, because. itpromises to eliminate uncertaintyfrom international financial dealings.The widget maker knows, when hegets an order from abroad, that themoney he will receive will be worthas much to him in the future as atpresent.In practice, however, fixed-rate arrangementsprovide anything butcertainty. Between 1944, when thepresent fixed-rate system was conceivedat Bretton Woods, N.H., andmid-August [1971], when the systemfinally collapsed, 45 countries changedthe international rates for their currencies.In some instances, changeswere repeated many times, so that inall 74 currency-rate changes occurred.8The problem with such devaluations,as Mises has shown, is thatthey create incentives for retaliatorydevaluations on the part ofother governments. "At the end ofthis competition is the completedestruction of all nations' monetarysystems."9 If there were nofixed exchange rates in the firstplace, there would be no need forthese governmentally imposed economicdiscontinuities.International Stability, a MythThe myth of international monetarystability is just that, a myth.Stability can only be approached,like economic equilibrium, andthen only by the free price mechanism.Exchange rates cannot befixed without increasing the pressuresfor the radical discontinuitiesof revaluation and devaluation.That is why the IMF rulesallowed for a 1 per cent band, upwardor downward, of flexibilityin exchange rates. That is whyrules imposed since December 19allow a currency a plus or minus2.25 per cent band. But fiat exchangerates cannot supply, stabil-