Monetary Protection

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Monetary Protection

Although the effect soon wears off. It takes more of the depreciated currency to buy raw materials, food and other things the country has to import. As these go up in price, manufacturing costs rise, and so does the cost of living. That puts pressure on wages and leads to further rises in costs. So, before long, the products the country has to sell are marked up. The advantage from the depreciation is gone. And not only is the advantage temporary; not many countries now want to encourage and suffer the inflation which is involved. The Swiss and the Germans, as we?ve said, have chosen to let their currencies appreciate even at considerable cost to their export industries. Swiss watches have been very hard to sell in recent times because they must be purchased in very expensive francs. Swiss hotels and ski resorts have been under populated because not only have the Americans, Germans and French found it cheaper to go elsewhere but the Swiss themselves, when they want to go skiing, find French mountains much cheaper than their own.

To depreciate and make it stick, more people must want to sell your currency than to buy. That will be true if your prices have been high relative to those of other countries and foreigners have been selling you goods and not buying. Your currency will be in surplus, and by encouraging the sale of the surplus you can depreciate easily enough. But, if you have had no internal inflation, your currency will have been in demand to buy your goods. And people will seek it to hold. Then there is no accumulation to sell. This being so, though some manipulation is possible, it won't go down very far or for very long in relation to other currencies. The Swiss National Bank can sell Swiss euros and so expand the supply. And it can lend more freely and encourage the Swiss government (with some difficulty, we may say) to run a larger deficit. And wage restraints can be relaxed. Then the Swiss euro will fill in relation to other currencies but only because prices in Switzerland will be rising. Again, you see, the rate of internal inflation is ultimately the controlling factor.

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Eurodollars And The Petrodollars

These are a symptom rather than a disease. In the sixties and early seventies the United States bought much larger quantities of goods in Europe and elsewhere than it was selling; it also had many more tourists visiting Notre Dame, the Louvre, the Place Pigalle and other centres of culture and rest than there were Europeans visiting the Grand Canyon and Times Square. In consequence, dollars accumulated in Europe and these were augmented by Americans investing in European enterprises. That is all; the Eurodollars accumulated naturally from Americans buying more than they sold.

Similarly the accumulation... see: Eurodollars And The Petrodollars

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