Josef Herbert Fürth on Exchange Equalization Funds and Monetary Policy (1947)

Josef Herbert Fürth’s review of H. M. H. A. van der Valk’s Egalisatiefondsen en Monetaire Politiek in Engeland en Nederland examines a comparative study of British and Dutch exchange stabilization funds during the 1930s. Fürth presents the book as an inquiry into how exchange intervention affected domestic credit, banking operations, economic recovery, and governmental control over monetary policy. His assessment combines appreciation of its historical and institutional breadth with doubts about the consistency of its theoretical argument and policy recommendations. The review’s central concern is that stabilization cannot be judged through exchange rates alone: its effects depend on banking practices, the composition of capital movements, and the relationship between domestic recovery and international adjustment.

Fürth first maps the study’s scope, including its treatment of commercial credit, open-market operations, discount rates, and cyclical fluctuations. He also notes appendices on the Netherlands Bank, official statements establishing the Dutch fund, British balance-of-payments measures, and the revaluation of Dutch gold holdings, together with an English summary of the Netherlands findings. These materials support a comparison of monetary institutions and policy choices, rather than simply an account of exchange-market operations. He identifies the study’s governing distinction:

According to the author, stabilization funds have the dual purpose of combatting unplanned fluctuations in the exchange rate and of sterilizing the flow of "flight capital," with the second function being of paramount importance in the period under consideration.

Sterilization becomes the analytical link between international capital movements and domestic monetary conditions. Both countries experienced large capital inflows after devaluation, followed by outflows associated principally with the increasing danger of war. Yet the form of these movements differed. In the Netherlands, foreign investment was mainly long-term, and the fund could sterilize inflows by buying gold and selling securities. British inflows also involved bank deposits and the hoarding of sterling notes, requiring supplementary Bank of England operations. Purchases of bills counteracted the reduction in banks’ cash ratios, while additional note issues offset the contraction of circulating currency caused by hoarding. Fürth’s exposition makes the banking mechanism essential to explaining why nominally similar funds produced different results.

The contrast becomes sharper when he turns from operations to consequences. Dutch banks did not maintain strict cash ratios, and their flexibility already supplied considerable automatic sterilization. Additional intervention therefore risked exceeding what the monetary system required:

The additional sterilization efforts of the fund thus brought about an oversterilization: in the period immediately following the devaluation of the guilder, its policy hindered an expansion of credit which would have furthered the country's recovery, and in later years it added to the overliquidity which not only created dangers of inflation but also induced Netherlands banks to make investments of questionable character.

This passage connects two distinct failures: restricting recovery-supporting credit immediately after devaluation and subsequently encouraging excessive liquidity and questionable investments. In Britain, by contrast, incomplete sterilization accommodated the government’s policy of credit expansion and low interest rates. Fürth reports van der Valk’s view that this credit policy, more than devaluation itself, explained the rapid recovery after 1932. Improved terms of trade also helped, although British prosperity came with deterioration in the international financial position, persistent current-account deficits, and intensified financial disorder.

The comparison thus extends beyond technical differences between funds. Britain could insulate domestic recovery from foreign disturbances more successfully than the Netherlands, whose greater dependence on international trade exposed it to continuing depression abroad. Fürth also records the study’s paradoxical claim that increased labor efficiency contributed to Dutch difficulties, without elaborating its mechanism. British real income rose substantially during the decade, whereas Dutch real income failed to regain its 1929 level.

Fürth nevertheless finds that the breadth of the inquiry leaves its evaluative framework uncertain:

The author left at least this one reader in some doubt about the theoretical basis and the policy recommendations of the study.

His criticism concerns the relationship between explanation and prescription. Van der Valk invokes Keynesian reasoning to emphasize low interest rates in Britain but apparently does not regard lower rates as beneficial for the Netherlands. He condemns British beggar-my-neighbor policies while criticizing Dutch internationally oriented policies still more strongly. Fürth does not resolve these tensions by supplying a general alternative theory. Instead, he identifies a concrete unresolved question: why Dutch authorities between 1936 and 1939 allowed the guilder to fluctuate by roughly four percent, enough to disrupt calculations requiring stability but insufficient to enable a planned export expansion or protection of domestic industry.

The closing section establishes the study’s relevance to postwar monetary arrangements. Fürth treats the International Monetary Fund as inheriting many functions previously performed by national stabilization funds. The institutional issue is control over monetary policy:

The author rightly stresses the fact that the establishment of stabilization funds meant the transfer of control of monetary policy from more or less independent central banks to the governments.

The IMF partly reverses this movement by transferring authority to an institution independent of any single government. Fürth also connects stabilization funds, understood as a more liberal alternative to exchange restrictions, with Bretton Woods rules against restrictions on current transactions. Continued national control over capital transactions complicates that parallel. His final judgment is therefore qualified but constructive: despite unresolved theoretical questions, the British and Dutch experiences offer practical lessons for managing conflicts between international monetary institutions and national policy.