The Freeman 1972 - The Ludwig von Mises Institute

180 THE FREEMAN Marchvocates of fixed exchange rates, asKeynes would seem to demonstrate.The issue is not whetherfloating exchange rates will makeit easier for domestic governmentsto inflate. The issue is whetherprice controls are legitimate toolsof government economic policy. If .they are, then we can begin to examinethe specifics of the argumentsfor fixed exchange rates. Ifthey are not, then the debate .isended. For fixed exchange ratesare,· by definition, price controls.Good economic theory results ingood economic practice, as Misesand Hayek have explained repeatedly.We do not apply sound economictheory and produce economicdisaster. Thus, it is possibleto argue that free pricing in internationalmonetary affairs will bebeneficial to all citizens who wishto enter the market in order tomake voluntary exchanges. Freepricing among the various nationalcurrencies will help to exposethe policies of monetaryinflation in any given nation,thereby adding incentives to citizensof that country to challengetheir government's policies. This,of course, assumes that citizensgenerally are economically rationaland prefer good consequences tobad ones. It is easier for a man tocount the costs of· socialism in themonetary sphere if he can witness,daily, the statistics that chroniclethe deterioration of the purchasingpower of his money.Let Citizens Own GoldIf a citizen can own gold, somuch the better. If a free marketin gold is allowed to operate, somuch the better, for the price ofgold, in relation to the citizen'spaper currency, will rise as a consequenceof the continuing monetaryinflation. This gives a citizenthe opportunity to make a profitby taking his paper money to thelocal branch of the national Treasuryand buying gold at the fixed,legal rate of exchange (which hasbecome a legal fiction as a resultof· the monetary inflation).Let citizens, rather than thestate, profit from the higher priceof gold. Let their desire to makea profit act as a barrier that helpsto retard state officials in their inflationarypolicies, as the Treasury'ssupply of gold decreases.A fixed rate of exchange betweengold and a currency is notthe same thing as fixed rates ofexchange between currencies. Afixed ratio between gold and anyparticular currency is definitional:a. unit of paper money is said, bydefinition, to represent so muchgold at a specific fineness. Freeconvertibility of a currency intogold requires a legalized fixed ratioof exchange; ·free convertibilityofone national currency with