Wilhelm Röpke, Exchange Controls Must Go (1954)

Wilhelm Röpke’s periodical article argues that restoring currency convertibility is indispensable to rebuilding international trade and investment. Its central target is the belief that the European Payments Union (E.P.U.) provides a progressive route toward that restoration. Röpke instead treats it as a temporary expedient becoming entrenched: it facilitates payments within Europe while perpetuating exchange controls, subsidizing monetary indiscipline, and discriminating against trade outside its membership. The article moves from a historical and political indictment of exchange control through an institutional diagnosis of the E.P.U. to proposals for dismantling it.

Röpke begins by presenting exchange control as an exceptional exercise of coercive state power, historically associated with ruthless rulers, Bolshevism, and the police state. Its wartime adoption subsequently normalized what had supposedly been an emergency measure. He regards the persistence of controls after the war as evidence of a deeper commitment to inflationary and collectivist policies, notwithstanding the anticipated restoration of convertibility under Bretton Woods. Governments sustain controls less by defending them openly than by calling their abolition premature or attaching prohibitive conditions to it. Beyond their infringement of individual rights, their decisive consequence is the fragmentation of economic relations:

Without free convertibility there can be no world-wide multilateral trade; without world-wide multilateral trade there will be no world economy.

Convertibility thus means more than convenient currency exchange. It enables payments, trade, and capital movements to connect across national boundaries without administrative allocation. Röpke acknowledges that smoother administration has mitigated some intrusive features of controls, but insists that it cannot remove their systemic obstruction of international commerce.

The E.P.U. embodies this distinction between practical improvement and structural freedom. By offsetting members’ payment surpluses and deficits, it helped restore multilateral European trade and remove many quantitative import restrictions. Yet these achievements leave exchange control intact. An institution intended to become unnecessary has acquired reasons to preserve itself:

Its very purpose was to make itself superfluous.

Röpke organizes his criticism around two “diseases.” The first, theoretically curable, is inadequate monetary discipline among members. Governments maintaining inflationary pressure through fiscal policy, cheap money, and full-employment commitments generate persistent external deficits. The union’s machinery then makes countries pursuing stability their involuntary creditors. Switzerland, West Germany, Belgium, the Netherlands, and Austria figure prominently in this group. Germany’s position is especially striking because a country devastated by war has become the principal creditor and, in Röpke’s account, a principal victim of the arrangement.

The burden is not simply financial. Deficit countries restrict imports instead of correcting domestic inflation, while creditor countries are pressed to liberalize theirs. Trade restrictions consequently displace monetary adjustment as a means of managing external imbalance. Röpke illustrates the resulting perversities through Switzerland’s reluctance to accept German debt repayments that would enlarge its E.P.U. credits. He also emphasizes the asymmetry between debtors paying their full deficits in gold and creditors receiving only half their surpluses in gold. American assistance helps sustain this mechanism, postponing the correction of policies he considers unsound.

The second disease is inherent in the union’s regional scope. Even disciplined members would retain different trade balances with Europe and the wider world. Germany’s European surplus and external deficit cannot be freely offset against the opposite pattern elsewhere when currencies remain inconvertible.

The E.P.U. is a regional monetary bloc, with all the evil consequences of such a bloc, including in particular the discriminatory treatment of countries outside it.

The dollar area bears the main cost. Germany cannot freely use its European earnings to purchase American goods because only part of its surplus becomes available as gold or dollars. Röpke therefore challenges the language of “European economic integration”: arrangements praised as integration can reproduce autarky, planning, and bilateralism on a continental scale. His alternative is not merely a larger European market but a worldwide multilateral system.

Having established these institutional obstacles, Röpke reduces the problem to its domestic monetary foundation:

Exchange control, however, is merely a policy that defends by police force a disequilibrium on the exchange market which would not exist without erroneous monetary and fiscal policies of the national governments.

The proposed remedy combines restraint against inflation, credit adjustment, confidence in the currency, conditions favorable to capital, and, where necessary, an exchange rate reflecting purchasing power. His conceptual distinction is between collectivist “austerity,” which prohibits desired imports, and liberal “austerity,” which adjusts money and incomes to actual resources. Convertibility requires this policy change, not another international institution.

The conclusion balances national responsibility with a coordinated escape from the existing system. Canada’s abolition of controls in December 1951 demonstrates, for Röpke, that a government can act independently. European creditor countries are better prepared than their continued participation in the E.P.U. suggests, but hesitate because of their institutional entanglement and Britain’s unwillingness to lead. He therefore proposes a convertible nucleus among the principal creditors and the dollar area, preferably developed in consultation with Britain and the United States. Payments relations with other members would temporarily continue through the E.P.U., under stricter debtor conditions, allowing it gradually to expire. The article’s significance lies in this conjunction of liberal monetary principle and transitional strategy: regional cooperation is judged by whether it restores open international relations, rather than by whether it perpetuates its own machinery.