Jack Kemp

Countries that anchor the value of their currencies to a larger, relatively stable currency, such as the dollar and the euro, are wrongly accused by many world leaders of "manipulating" their currencies. Leaders who pressure countries with fixed exchange rates to allow their currencies to float freely on foreign exchange (Forex) markets aren't considering the inherent limitations of currency markets, and they fail to appreciate the economic havoc floating exchange rates create.

Two fundamental freedoms are necessary for markets to work properly - one relating to prices and the other to production. First, producers must be free to establish the price of their products without outside interference by governments or private syndicates, and consumers must be free to choose whether or not to purchase products for the posted prices, i.e., no price controls. Second, producers must be free to produce as much or as little of their products as they wish without outside interference by governments or private syndicates, and consumers must be free to purchase as much or as little of goods and services as producers are willing to sell them, i.e., no forced rationing.

Many ersatz markets exhibit only one of these fundamental market freedoms. In the electricity market, producers and consumers are free to produce and consume as much electricity as they desire, but government sets prices directly. The world oil market and Forex markets illustrate the obverse form of quasi-free, ersatz markets where OPEC and governments do not fix prices directly by fiat order but rather control production and ration output.

The auction market in which buyers and sellers bid the price of oil daily, ironically, is the oil syndicate's tool for efficiently rigging the market to their advantage. If OPEC desires the price of oil to rise, it restricts output, and the cartel opens the production spigot if it wants prices to fall.

Very few people delude themselves that the auction market in oil results in an efficient level of oil production. However, many government and business leaders delude themselves that the efficient "value" of the dollar can and should be determined by freely floating exchange rates. The value of a nation's money is determined by its monetary policy (i.e., how much money it prints) and is reflected in changes in the prices of commodities, most especially gold. The correct value of the dollar is one that keeps these prices stable.

Jack Kemp

Jack Kemp is Founder and Chairman of Kemp Partners and a contributing columnist to Townhall.com.
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