Steps Towards War?

In Detroit the word got around fast. The Canadians had revalued their dollar. Instead of being worth only 91 U.S. cents, it was now worth a U.S. dollar. But Washington apparently had not heard about it. At the postoffice, smart Detroiters were still able to buy postal orders for cashing in Canada at 91 U.S. cents for a Canadian dollar. The Detroiters cashed the orders in Canada. The Canadian dollars were turned in, dollar for dollar, for U.S. dollars. The quick profit: 9%.

Not till thousands of dollars in such shenanigans had been made all along the border did sleepy Washington wake up last week and stop the funny business. But Washington could not so easily stop the funny business going on with the U.S. dollar all over the world.

The death of OPA had started it. Canada had upped the value of its currency because it feared that i) prices in the U.S. would soar much faster than they had (see Prices), 2) the U.S. dollar would be worth much less. Last week, Sweden hastily followed Canada's lead. It also raised the value of its currency, boosting the krona from 23.82 U.S. cents to 27.77 cents, a 14% increase. Both nations were guessing that the U.S. would have 10 to 14% more inflation than it now has. There were reports that Argentina, and several other nations, would soon revalue their currencies also. In short, a first skirmish of a new currency war, such as had killed off world trade in the early '30s, had taken place.

But now the reasons were just the opposite. Then all nations were gripped by deflation. They had unemployment, falling prices, and few had the cash to buy. Nations found that the best way to handle deflation was to export it. They devalued their currencies (to sell cheaper abroad and make imports dearer), upped their tariffs, set up import quotas. In short, they tried to dump their unemployment and deflation on one another. This policy failed dismally because everybody devalued. Instead of exporting deflation, everybody got poorer.

Now, all nations are faced .with inflation. There is plenty of money, but little to buy. Consciously or not, Canada and Sweden had decided to export their inflation. Revaluing their currencies made their imports cost less, thus more goods could be brought in. But their exports cost more, so fewer goods would go out. The U.S. last week also decided to export its inflation, to a certain extent, by restricting many exports (see Foreign Trade) while it continued to buy all it could in world markets. But as wealthier nations export inflation, by buying more and selling less in the world market, competitive revaluation, like competitive devaluation 15 years ago, would tend to push the whole world higher into the stratosphere of inflation.

All this was an ironic footnote to Bretton Woods. The Monetary Fund was supposed to prevent currency wars. But its founders were thinking of depression and the export of deflation--i.e., wars to devalue currencies. That kind of a war seemed such a far-off possibility that the nations took their time setting up the Fund. Now it would not be ready to operate for six months. Would a first-class currency war be delayed that long?

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