True Yardsticks of Solvency

MONEY BLACK MARKETS

THERE are three things," said an old Swiss banker, "which determine the price that money brings--the stupidity of men, the mess they've made, and the law of supply & demand." One of the greatest stupidities of men is the notion that the value of a nation's currency can be set by arbitrary government controls. Instead, it is a nation's internal solvency, its balance of exports over imports, and the competence of its government which determine the price of its currency. That price is not set by official fiat but by the black (or "free") currency markets of the world.

Actually, although many governments forbid such markets, most of them wink at them, even participate in them, for the simple reason that without them much international trade would die. In Paris, for example, right after the Bourse's legal trading closes at 1:15 p.m., the "illegal" currency market opens on the balcony--with a uniformed policeman keeping order. Such markets have been so common in Europe that U.S. tourists took them for granted, exchanged their money on streets with ease. But this summer tourists are finding a big change. Except in France, the money black markets have all but disappeared, because economic recovery has raised the price of "free market" currencies very close to their "official" or pegged prices.

Free currencies have hardened most in those nations which worked hardest to reconstruct their war-shattered industries and to put their financial houses in order. Since Churchill's belt-tightening program, Britain's "free market" pound has risen from $2.35 in New York to close to the official rate of $2.80. West Germany's Deutsche mark has risen in value from 6-c- to around 22-c-, and is rivaling the Swiss franc for stability. Italy's lira, which sank as low as 915 to the dollar during 1948's fears of Communist election victories, is almost up to the official rate (625). The Benelux nations--Belgium, The Netherlands, Luxembourg--established such a good postwar export trade that their stable currencies did not even tremble during the disastrous floods. By contrast, France, still without a Premier, was running so big a governmental and export deficit that the U.S. last week had to put up $37 million to help stabilize the franc. In its own black market, the franc has dropped to around 415 to the dollar, v. the official 350, a spread so wide as to raise talk of a new devaluation.

Despite the recoveries made by many currencies, the machinery of the world's foreign-exchange mechanism is still jammed by a thousand monkey wrenches in controls imposed by various governments. But money always finds a free market--and its true worth. Thus, when Britain imposed the most rigid currency controls, the effect was to create dozens of separate varieties of sterling in the world's black and free markets--including "satchel" sterling used by smugglers. No matter what regulations were made to block the export of currency, money manipulators found a way around them.

Frequently the evasion schemes have the tacit connivance of the governments themselves, as in the complex worldwide swappings of hundreds of types of "clearing currencies," i.e., blocked credits of traders who are unable to spend them. They sell the currencies at a discount to others who can use them, and in return get a credit in a currency they can spend.

These deals are often made possible by existence of the world's big free-money markets, New York, Zurich, Tangier, where currencies are traded without any questions about their origins or any limitations on their use. Even the nations which try to control their currencies find these markets useful. In the past, Spain has dumped its controlled pesetas in Tangier, at any price, to get dollars to buy goods.

Though most nations have long since left the gold standard, the world is still on an invisible gold standard, in the sense that the stability of currencies is roughly measured by the price that gold, sought by hoarders, brings at any time. When the world's postwar inflation was at its worst, bar gold--pegged by the U.S. at $35 an ounce-soared as high as $71 in Zurich. Now, in Zurich, it is back down to $36.92, a sound indication that big hoarders--i.e., those who can afford to buy a whole bar of gold--no longer fear inflation and have more faith in the world's currencies. But small hoarders still pay as much as $46 for such favorites as "Eagles" (U.S. $20 gold pieces, outlawed in the U.S. itself).

Currency controls undoubtedly were necessary while nations got back on their feet at World War II's end, much as a bank may have to be closed during a run until the true value of its assets is assayed. But wherever nations have thrown off such controls, the results have been phenomenal, notably in Canada. Since Canada freed its dollar in 1951, the value has risen from 90-c- in U.S. money to as high as $1.03, is currently at par with the dollar. With money, as with tariffs, the best stimulant for greater world trade is the least possible restriction upon freedom.

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