Devaluation Again?

After two years of comparative stability, some European currencies were so shaky last week that devaluation talk again filled the air. The French franc was in the most trouble. Between midsummer and early October, the franc on the Paris black bourse had cheapened from 365 to 400 to the dollar (official rate: 350). Last week it plummeted to 440.

Although inflation had been creeping up in France for some months, the headlong drop was unexpectedly sudden. Frenchmen evidently feared that France's rearmament effort will be a real strain on resources when it changes from a sizable figure (on paper) of 10% of the gross national product to an even greater figure of actual production. Consequently, they were turning their francs into gold, dollars and goods. They also knew that if sterling was devalued, the franc--contrary to experience in September 1949--would not be prevented this time from following it all the way down.

Sterling was also weakening fast on the world's free markets. In Zurich, pound notes (smuggled into Switzerland by British tourists) were being sold (to people who would have to smuggle them back to

Britain before they could use them) for $2.32, as against $2.45 a week before. More seriously, "transferable sterling," which the British accept from European and other "soft currency" countries who cannot pay them in dollars, was selling in New York at $2.40, a discount of 14% on the official rate of $2.80. At this rate, slick continental operators could buy Malayan rubber or Australian wool (telling the British it was for their own account), then transship it straight to New York and undersell Britain's direct, dollar-earning sales. This "leak" in Britain's tight control on sterling-into-dollar exchange was a potent cause of sterling's devaluation in September 1949.

Devaluation had plugged the leak, but sterling's recent fall has once more made such deals profitable, thus put new pressure on the pound. As sterling wobbled, other currencies sensitive to sterling shook also. In Italy, the lira skidded to 688 to the $1, the lowest point since last March.

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