The currency peace - Rudolf Hilferding

1936, 'Der Währungsfrieden. Der Weg zur Wiederherstellung der Goldwährung', Neue Vorwärts, No. 173, 4 October.

The Currency Peace. The Road to the Restoration of the Gold Currency

In the night of 26 on 27 September, almost to the day five years after the lifting of the British gold currency, the French government has decided the devaluation of the franc. The gold content of the franc, which hitherto was 65.5 milligrams, is reduced by about one third. The new gold value should be between 43 and 49 milligrams, the final determination will be made first at a later date. After short hesitation, the government of Switzerland has followed the French example, and the Swiss franc will be devalued by about 50 per cent. The Dutch government has at first adopted a gold export ban, so that there can be little doubt, that the Dutch guilder will experience the same fate. The gold block is over.

In the assessment one must distinguish the international from the internal-economic and political effects. Internationally it is significant that the French currency alteration has been made in agreement with the governments of Britain and the United States [the Tripartite Agreement]. In a statement, that is the result of long negotiations, which, as we now learn, already were initiated in June, the two governments give France the promise, that they on their part 'will maintain the greatest possible balance on the international currency market and will avoid anything, which could disturb this balance due to a British or American currency action'. The British and the American government will thus follow a policy of actual currency stability and on their part avoid any new currency war. Therewith in the major part of the capitalist world economy, that has remained outside the currency control management [Devisenzwangsbewirtschaftung] and the more or less complete monopoly on foreign trade, the currency fears and crises which have so often shaken it, are no doubt definitively eliminated, provided however, that French domestic policy succeeds, to maintain also steady the new parity.

The currency, to which the other currencies and therewith exchange rates had oriented themselves, was the French gold currency. From now on it will be the dollar currency. Now the American declaration says, that no use will be made of the still existing authority of the president, of being able to reduce the gold content of the dollar by 10 per cent. Thereby however the dollar currency becomes actually again a pure gold currency, and the American currency authorities have also already more than a year operated the dollar currency in strict accordance with the laws of the gold currency.

Under these circumstances the promise of the British government, to maintain the stability of the pound exchange rate against the dollar, means nothing more than that also the movements of the pound are tied to gold, the English and therefore all currencies of the extensive sterling bloc practically become gold currencies. The end of the gold bloc therefore means not in any way the dethronement of gold. On the contrary: the restoration of the gold currency de facto, will facilitate its restoration de jure.

What influence on prices will come from the new currency devaluations? When England went off gold on 21 September 1931 and the pound gradually depreciated by about 40 per cent, one expected a strong pick up of prices, which had after all also occurred with the inflation of the war and post-war period. After the English devaluation the price hike initially did not materialise and also later set itself through only very gradually. Up until now the price adjustment is still far from complete. The phenomenon can be explained firstly by the fact, that the devaluation took place at the height of the world economic crisis and the prices, in particular those of raw materials, had as a result of the overproduction and the huge inventories in themselves still a strong downward tendency; secondly, the devaluation took place in a world economic decisive area, since the British Empire was followed in addition to the border states and Scandinavia also by important Central and South American countries, so that the sterling bloc comprised important industrial and raw material producing countries; finally there also took place, still during the crisis, the devaluation of the dollar in similar proportion. The demand was executed thus on the largest part of the world market in devalued currencies. The prices were pound and dollar prices. Only since the de facto stabilisation of the dollar and the pound they have again become gold prices. Now the devaluation takes place however for a start in a time of rising prices and [secondly] in a world economic not at all decisive area. Therefore it is hard to assume, that from the new money depreciation will emanate substantial influences on the international price level. The ascent of the upward directed price curve will hardly experience an interruption.

This however is significant for the assessment of the inner economic consequences. Unlike in the sterling bloc back then, the prices of imported commodities will in the now devaluated countries rapidly increase to the full extent of the devaluation. This means increased costs and rising prices also for other products. The further development will depend on the economic policies, that the individual states will pursue. In the area of the sterling bloc wages and salaries in the period immediately after the devaluation were even somewhat reduced, without lowering the real wage, since food prices were declining. Now the opposite development must be expected. The French government, led by Socialists wants not and cannot think of letting the workers become victims of the devaluation. But if, as it is announced, sliding wage scales are introduced, if also the social and veterans' pensions are raised, then the price upswing will rapidly generalise itself despite all countermeasures and cancel the benefits of devaluation, which consists of the encouragement of exports.

Even more difficult for the French government is another problem. It has found poor finances at its commencement. The deficit of the state, including that of the railways, was about 15 to 18 billion francs. The tax burden did not allow a further increase and the bond market refused. The new government needed however for the recovery of the economy significant resources, and also the increase of military expenditure forced upon it by Germany exacts weighty sums. By the devaluation there emerges now at the Bank of France an agio profit on the gold treasure to the amount of 30 per cent. The gold reserve is around 52 billion francs of previous currency. The government will claim this agio profit for itself and so obtains a sum of slightly more than 15.5 billion francs. But this amount, of which a portion must be used for transition operations, is scarcely sufficient, to cover the hitherto arisen deficit. The problem, of bringing the budget into balance, can by the revival of the economy, which is expected as impending result of the devaluation, be somewhat relieved, but it continues to exist regardless of the currency alteration. As in England and recently in Belgium, it demands its independent solution. Because when the deficit economy continues, the same difficulties, that now have forced the devaluation, will arise anew. The struggle for financial rectification [Sanierung] will thus break out anew and place the government of the Popular Front before serious difficulties. They will be all the greater, since the money devaluation in the classical land of rentiers and savers in itself is very unpopular.