II

INFLATION AND DEFLATION

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up taxes, but to stabilise the franc exchange be-yond doubt or criticism near its present level.

How to stabilise the franc exchange? Not sodifficult as it is supposed to be. The balance oftrade is strongly in favour of France . The pre-sent level of internal prices encourages exportsand discourages imports. The metallic reserveof the Bank of France is worth (at the presentexchange) nearly 40 per cent of the note issue.Nothing is required, I expect, but that the Bankof France should declare that for two years atleast it will furnish dollar exchange against francsin unlimited amounts on terms not worse thansome stated rate between dollars and francs, andthat the Bank should be prepared, if necessary,to use its gold for the purpose. The rateselected should probably lie somewhere between1 dollar for 25 francs and 1 dollar for 30 francs,and it would be safer to choose the latter ratioat first, with just a hope that the former mightbe achieved in the end. 1 The success of thescheme requires no more than that the Bank ’sundertaking should be believed. With thisbackground of stability you will be able toborrow enough to carry you through the tran-sitional period without further Inflation.

For the rest you can trust time. As the in-ternal price level gradually rises to an equili-brium with the exchange and as the machineryfor collecting the taxes is gradually improved,your budget receipts will grow month by month

1 [This was a happy guess, since the actual figure adoptedtwo and a half years later was 25-5 francs to the dollar.]