The Morality of Currency Speculation

Along with every recession comes the inevitable call for intervention by government central banks: increasing the money supply (by means of cutting interest rates). Currently, even with the benchmark federal funds rate at a very low 1.75%, the economic slump persists, and some expect the Federal Reserve to cut rates even more.

Typically, monetary expansion leads to rising prices and extensive distortions in the economy. As the depreciation of the currency becomes apparent, currency holders generally will not stand still for their currency to erode further, but will try to exchange it for other assets. Many people find that it is easiest to exchange their domestic currency (say, the peso) for a more stable foreign currency (the dollar). Peso holders rush to sell their pesos for dollars, driving down the dollar price of pesos (the exchange rate).

So governments that want to inflate to raise funds face a problem. The value of their currency falls relative to others. This favors domestic firms that export to other nations, and hurts domestic consumers who now find their pesos do not go as far when they want to purchase imported goods. As we observed in Argentina in the past year, domestic citizens can become outraged when they see the government destroying the value of their currency, particularly when the government prevents them from escaping into a more stable currency.

The government might respond to the outrage of peso holders by trying to set the value of the peso at an artificially high level with respect to foreign currencies. Of course, as with any price floor (where a minimum legal price is established), a shortage develops. The government that has created this shortage by combining inflation with price controls then begins to complain about "dollar shortages." Those who need dollars to buy foreign-made goods, or to repay debts denominated in dollars, are stuck. As the great Austrian economist Ludwig von Mises showed in Human Action, this results in still more intervention:

As the government and its satellites see it, the rise in foreign exchange rates was caused by an unfavorable balance of payments and by the purchases of speculators. In order to remove the evil, the government resorts to measures restricting the demand for foreign exchange. Only those people should henceforth have the right to buy foreign exchange who need it for transactions of which the government approves. Commodities the importation of which is superfluous in the opinion of the government should no longer be imported. Payment of interest and principal on debts due to foreigners is prohibited. Citizens must no longer travel abroad.

Those importers favored with a government license to acquire dollars can reap huge profits, as they trade in their pesos at the official rate, acquiring dollars on the cheap. Whatever they import, they then sell for pesos — at the true market price. It is a money mill. The government does not usually hand out such valuable prizes for free, however. For being allowed to run this operation, the government will levy heavy taxes on imports.

Those citizens who have dollars held in domestic banks (as many Argentinians did) run the risk that their government will confiscate the currency, prevent them from exchanging it, or at least force them to exchange it for the domestic currency at the official rate. The policy hurts exporters. So, following the universal maxim of statists that failed government intervention requires more intervention, the exporters are subsidized. Of course, subsidies require funds, which the government may obtain from the taxes levied on importers. As Mises pointed out,

Then, of course, foreign exchange control works. But it works only because it virtually acknowledges the market rate of foreign exchange. The exporter gets for his proceeds in foreign exchange the official rate plus the subsidy, which together equal the market rate. The importer pays for foreign exchange the official rate plus a special premium, tax, or duty, which together equal the market rate.

The entire process tends to leave much of the foreign trade process in the hands of the government. Trade is not managed efficiently by a market process, but is run by bureaucrats. A corrupt political process prevails over consumer desires as the method by which goods and services are allocated in society. The danger remains, too, that as the government expands, its search for revenues will produce even more meddling with the trade process. For the same reasons that inflation was chosen in the first place, it is likely to be chosen again, so that the problem can spiral downward into chaos and financial disaster.

For any problems resulting from these schemes, the government needs a scapegoat. Inevitably, the currency speculator is chosen as the origin of these evils. The holder of the depreciating currency becomes a speculator if he tries to get rid of it because he expects future deterioration. The speculator may want foreign currency, or may wish to buy foreign real assets. This is called capital flight, though the term is somewhat misleading because, unless the owner wished to physically move factories (which is prohibitively expensive), the capital stays put and the owner is only able to get out by selling off the factory at fire sale prices to a foreigner and pursuing future investments elsewhere. The situation might be better described as a halt in domestic investment, and a reluctance of investors (foreign or domestic) to invest where inflation and the accompanying price regulations are being imposed on the economy. Thus, in nations subjected to high inflation rates and oppressive government regulations, existing factories are allowed to deteriorate and little new investment is made.

To succeed, then, the speculator must be able to find someone who is willing to buy the depreciating money — but willing purchasers may only be found when the price is low, i.e., when the number of dollars per peso is low. This downward movement of the exchange rate is exactly what the inflating government is trying to prevent. Obviously, these evil speculators who actually think that the peso is going to drop in value, and act accordingly, must be stopped!

Here, regrettably, some churchmen have joined in the condemnation of currency speculators, and supported the inflationary tendencies of national governments. In a statement by the 1996 General Assembly of the Presbyterian Church (USA) called "Hope for a Global Future," the sentiment is clear: free markets in currency must not be tolerated, because it requires the state to feel the consequences of its own inflationary policies.

A globalized money system that recognizes no geographic boundaries tends to undermine the ability of each national government to control its money supply and influence the value of its money. This means that many governments end up with fewer policy options to control the level of employment and inflation at home, and even governments that retain substantial control of their monetary policy may be forced to set interest rates higher than desired in order to prevent the flight of capital out of their country.

In other words, a government that wants to steal wealth from currency holders by increasing the money supply (yes, steal; see Isaiah 1:21-27, Leviticus 19:35, 36, as well as R. J. Rushdoony's comments in The Roots of Inflation, pp. 1-5) is going to run up against the fact that people do not like to be fleeced, and will try to move their wealth to a safer place (or currency). The impertinence of these speculators! The recommendations the General Assembly provided were "outright restrictions on speculative capital transfers with all their potential for abuse and corruption." Compared, one must suppose, to the near impossibility that governmental power over the money supply and trade would be abused or corrupted in any way? A "more moderate" solution involves regulation a tax on currency trades, or the aforementioned accompaniment to foreign exchange controls: "controls on the trade accounts, e.g., import licensing…."

It seems that in the mindset of these churchgoing statists, any policy that increases the control of the civil government over the economy is good. Using a warped version of Calvinism, the General Assembly assumes here that individuals who use the market to allocate currency, capital, or anything else, are not to be trusted because of their fallen natures and their incomplete knowledge of the facts ("currency speculators place their bets in dizzying amounts without full understanding of the potential effects of their actions…."). Once those fallen individuals enter positions of power in the civil government, however, they may apparently be trusted (as long as they have the approval of the democratic majority, which is presumably less fallible collectively than the mere individual), and credited with something approaching omniscience. Apparently, they are even free to reinterpret the eighth commandment. Currency traders who attempt to reduce the effects of the theft are denounced. This brings to mind Isaiah 5:20 — "Woe to those who call evil good, and good evil; Who put darkness for light, and light for darkness; Who put bitter for sweet, and sweet for bitter!"