VII - The two rates: (1) Exchange

Abstract

Two of the most important elements in almost any exchange economy are, and are rightly thought to be, the price of other people's money and the price of one's own. The importance of both can be exaggerated. Certainly exaggeration occurs from time to time. Sometimes, a whole towering multitude of economic disasters is seen to result from a wrong rate of interest. The same is prone to happen with exchange rates, although their importance is more likely to be exaggerated and/or misunderstood than their level be subject to inadequate public debate. The world of the exchange economies never quite as thoroughly conformed to the textbook requirements of the gold standard as that. Nor was the gold-standard world as comfortably full of contented adherents as implied. The external stability of the economy was managed through an instability of the domestic economy. The experience of the United States with devaluation of the dollar between 1971 and 1973 shows that devaluation, far from being able to solve all external, trade, and payments problems, can introduce some serious problems that were not there to start with. This chapter discusses the character of any advantage that devaluation can offer to a modern economy. If one devaluation has already achieved a marked stimulus to production but has not yet achieved external balance in overseas payments, the United States' experience suggests that a second or subsequent devaluation might have only marginal or even adverse effects.