Channeling Sir Gresham

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The Swiss franc has recently been quoted on the foreign-exchange markets at within a cent or two of one U.S. dollar. In the heyday of the gold standard, the mint par was 5.2 francs per dollar, 19.3 cents per franc. Since then the dollar has lost four-fifths of its value against the franc, even though the franc itself has been devalued against gold.

Like all other countries, Switzerland has suffered price inflation since World War II. Episodes of imported inflation have resulted from efforts to keep the exchange rate fixed in the face of inflation abroad. But Swiss inflation has been less extreme than elsewhere, even in the United States, where inflation has been low by international standards but where consumer prices are now twelve times as high as at the end of the war.

Have the monetary policies that caused this inflation supported output and employment here? Would the United States be economically worse off without it? Of course not. Exchange rates and price levels provide a striking example of the short-run outlook and the irresponsibility of policymakers driven by politics.

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