Gottfried Haberler, The Choice of Exchange Rates after the War (1945)

Gottfried Haberler’s journal article examines how postwar governments should choose initial exchange rates when wartime controls, disrupted production, and uncertain inflation make equilibrium difficult to identify. Its five sections move from the objectives of exchange policy through the limitations of floating rates and purchasing-power parity to the conditions for removing controls and the comparative risks of misvaluation. The central argument is conditional: rates should support the anticipated transition to a less controlled economy, rather than mechanically reproduce wartime price relationships. For continental Europe, this generally favors an initially low valuation, but not depreciation without limit.

Haberler begins by subordinating exchange policy to broader international economic objectives, especially the restoration of currency convertibility. Immediate freedom is impracticable, but uniform, nondiscriminatory rates and consistency between direct and cross rates should be introduced from the outset. Stability is another objective, potentially in conflict with efforts to improve the terms of trade through overvaluation or stimulate employment through undervaluation. He regards the employment argument as secondary in the immediate postwar situation: unemployment concentrated in particular industries or regions requires specific remedies, not measures directed at a general deficiency of demand.

The exchange rate of a currency should be uniform, non-discriminatory.

This principle restricts the means by which governments can manipulate international transactions. Haberler’s desired equilibrium is not simply whatever balance can be maintained through controls; it must be assessed against the eventual possibility of freer exchange. Yet he rejects freely fluctuating currencies as a reliable way to discover that equilibrium. Capital flight and speculative expectations would destabilize rates, while capital controls alone could not prevent importers from advancing purchases and exporters from delaying sales in anticipation of depreciation. Such behavior could help produce the movement it anticipated.

Postwar reconstruction creates a further difficulty. Countries with devastated production would initially have little to export and urgent import requirements, depressing their currencies in a free market. As production recovered, those conditions would change. Following every temporary imbalance could therefore entail an initial collapse followed by successive appreciations, whereas choosing a sustainable longer-run rate might require temporary overvaluation and controls.

Occasional adjustments at irregular intervals is all that can be recommended to assure flexibility.

The rejection of continuous fluctuation makes careful initial valuation more important, without making permanent fixity the answer. Haberler next examines purchasing-power parity as the principal available instrument for estimating a rate. Its attraction is that relative price changes yield a concrete calculation; its weakness is that no such calculation incorporates all the determinants of international equilibrium.

Purchasing power parity is at best a very crude indicator and can yield only rough approximations.

Even under ordinary conditions, the base-period rate may have been inappropriate, and different price indices produce different results. Indices dominated by internationally traded goods may conceal misvaluation because those prices already adjust internationally. Retail or cost-of-living indices avoid that particular problem but do not establish an equilibrium relationship by themselves. Tariffs, changes in demand, capital movements, reparations, and investment income also matter. Britain’s loss of shipping and foreign investment income illustrates why restoration of its international balance could require a relative price adjustment beyond that suggested by historical parity. Observing payments disequilibrium identifies a problem more readily than it establishes the size of the necessary exchange-rate change.

Wartime conditions sharpen these qualifications. Interrupted trade allows national wholesale prices to move independently, making their comparison potentially more informative. But administered prices, rationing, and allocation undermine the inference that recorded prices represent purchasing opportunities. Low prices for unavailable goods cannot straightforwardly justify a high external currency value. Haberler’s discussion of Germany shows how differentiated export and import taxes and subsidies could sustain exchange rates disconnected from relative prices. Comprehensive control made the nominal exchange rate a policy instrument rather than an independent indication of equilibrium.

Purchasing-power parity nevertheless retains a prospective use: it can help assess the conditions under which controls might be removed, or indicate the compensating interventions required to maintain a chosen rate. The decisive question becomes which domestic price level could survive liberalization. Haberler expects substantial price increases in much of Europe, especially where liberation or surrender weakens administrative enforcement. Current controlled prices therefore cannot provide an unquestioned basis for postwar valuation. Where future prices are uncertain, parity calculations can only relate hypothetical exchange rates to the domestic price levels they presuppose.

The rate should be chosen in such a way as to interfere as little as possible with the price policy which a country is expected to pursue.

The final section turns uncertainty into a comparison of policy risks. Overvaluation helps restrain domestic prices and may improve the terms of trade, but obstructs the removal of controls and risks later depreciations that encourage capital flight. Undervaluation facilitates liberalization and reduces the likelihood of subsequent downward adjustments, but pushes prices upward and may worsen the terms of trade. Because continental European countries are unlikely to remove controls without substantial inflation, Haberler recommends valuations considerably below those implied by current purchasing-power parity. This is a judgment about transition, not a universal preference for cheap currencies. His article’s enduring relevance lies in distinguishing nominal stability from sustainable equilibrium and showing that exchange-rate choice depends on domestic price policy, institutional controls, and each country’s position in the world economy.