Foreign-Exchange Control Enables European Banks to Use the Government's Restrictions As a Way to Avoid Making Their Repayments Abroad

The primary problem behind the foreign-exchange controls comes from the fact that a number of European banks have invested long-term the equivalent of the short-term credits that have been extended to them from abroad, with no ability to pay on their part being anticipated in the near future. These banks are not in a position to fulfill obligations to their creditors to pay on demand or on short notice. It is the most difficult problem confronting these European banks today. Foreign-exchange control enables these banks to use the government’s restrictions as a way to avoid making their repayments abroad. But this does not resolve the underlying problem, it merely postpones it. This problem, however,must be resolved; otherwise a restoration of international relations in these as well as in credit matters in general cannot be restored.

Foreign-exchange control allows these banks to contact their creditors and temporarily arrange moratorium agreements. But these agreements do not provide a definitive solution. But a definitive solution must be found in order to restore the credit system and its functioning again in a normal manner. This is one of the principal conditions necessary for bringing an end to the world economic crisis.

The restructuring of the insolvent banks must therefore precede the abolition of foreign-exchange control. The banks whose balances are in severe deficit must be liquidated, and the losses that have occurred must be recognized as complete losses. It is useless to postpone the liquidation of these enterprises. The losses will only be made greater by delaying a final settling of accounts. Fortunately, the balances of the majority of the banks in question are not bankrupt but only insolvent. These banks would be in a sound condition if the maturity dates of their own debt obligations coincided with the dates when they received claims owed to them. It is necessary to make every effort to reach an arrangement through agreements between these banks and their foreign creditors, in collaboration with the governments of the various countries involved as well as with international organizations (the League of Nations, the Bank of International Settlements, the International Chamber of Commerce). This is all the more feasible considering that it is not in the interest of creditors that the banks in which they have placed their capital should fail and suffer further losses, only adding to the harm to themselves in the process. These arrangements should be initiated and carried out as soon as possible. Once they are, there will no longer be any obstacles, from this source, to delay the abolition of foreign-exchange control.

It would be superfluous, in this regard, to provide special legislation requiring that banks maintain their own liquidity in the future. The banks will do this in their own interest, particularly if it is clear that any bank that poorly manages it own affairs can have no hope of being kept afloat by government intervention at the expense of the rest of society.

—Ludwig von Mises, “The Return to Freedom of Exchange,” in Selected Writings of Ludwig von Mises, vol. 2, Between the Two World Wars: Monetary Disorder, Interventionism, Socialism, and the Great Depression, ed. Richard M. Ebeling (Indianapolis: Liberty Fund, 2002), 217-218.