Friday, November 14, 2008

Hey Judy Shelton: Enough already with the Gold Standard

Judy "one note" Shelton again graces the opinion page of the WSJ with an ode to the long defunct Bretton Woods system. Here is one freaky passage out of many:

"At the bottom of the world financial crisis is international monetary disorder. Ever since the post-World War II Bretton Woods system -- anchored by a gold-convertible dollar -- ended in August 1971, the cause of free trade has been compromised by sovereign monetary-policy indulgence."

Wow, people. Where to begin to parse this mess? Sentence #1 is completely false. At the bottom of the world financial crisis is a housing bubble and inadequate allowance for risk. Sentence #2 is misleading at best. Trade has exploded since 1971. Of course she could be arguing that it would have grown even faster, but that case is not being made. Further, internal politics in poor countries and rich country lobbies have compromised "the cause of free trade" by several orders of magnitude more than have any monetary shenanigans.

People, the Bretton Woods system never really worked. In the late 40s and early 50s there were massive devaluations undertaken without IMF permission. Throughout the 50s the US allowed Europe to discriminate against US goods. Full currency convertibility for trade didn't occur until the mid 60s, so the system as designed really started then, lasted well less than a decade, and was pretty much perpetually in crisis.

A world wide system of fixed exchange rates just won't work in a world of free capital flows, unless domestic government forsake all internal considerations and dedicate their monetary policies 100% to the peg. We have seen that no modern societies, whether democratic or autocratic are will to do this.

So Judy, repeat after me: (1) floating exchange rates have almost nothing to do with the current financial crisis. (2) The Bretton Woods system never worked as designed for any reasonable period of time. (3) Advocating a return to a pseudo gold standard is equivalent to howling at the moon given the political realities of our modern world.

People, a great book on all this stuff is Barry Eichengreen's "Globalizing Capital". Easily readable by non-economists and incredible informative and well written.

10 comments:

static said...

Actually I think she is right.
Your statement "allowance for risk" is the one that is difficult to parse. What does that mean "allowance"
If you mean that risk was mis-priced, then I agree. But that point supports Judy's premise.
It is the monetary policies that are flawed, and there is, today, not a single stable currency anywhere in sight.

Look at it! Just Look at it!

Anonymous said...

+1 static
Current account imbalances drive cross-border capital flows; financial institutions mediate these flows poorly. We get a crisis. Clearly this is symptomatic of international (monetary system) disorder. Take away the current account imbalances, you have no need for the financial flows. Without the financial flows, you get no crisis. (and if you think capital account drives current, then just reverse this).

One might even argue that an over-valued dollar of the early decade created incentive to invest in real estate (non-traded) rather than manufacturing (traded). The fact that governments won't accept fixed rates doesn't mean that floating rates fail to create problems of their own, which seems to be what you imply.

You're right about Barry J.'s book being excellent, but you don't seem to remember his argument. He stresses the destabilizing impact of cross-border capital flows in the contemporary international monetary system.

And on a small note, I don't know what you mean by "full currency convertibility", but Europe made currencies convertibility for trade in 1959 with the wrapping of the EPU.

static said...

+1 Anon
nicely put,
Judys article also had this:
“At the bottom of the world financial crisis is international monetary disorder. Ever since the post-World War II Bretton Woods system -- anchored by a gold-convertible dollar -- ended in August 1971, the cause of free trade has been compromised by sovereign monetary-policy indulgence. Today, a soupy mix of currencies sloshes investment capital around the world, channeling it into stagnant pools while productive endeavor is left high and dry… If we are to ‘build together the capitalism of the future,’ as Mr. Sarkozy puts it, the world needs sound money. Does that mean going back to a gold standard, or gold-based international monetary system? Perhaps so; it’s hard to imagine a more universally accepted standard of value.”

Which I read from your post in the same way, "financial institutions intermediate these flows poorly"
and greedily I might add.
bringing me back to the hugely mis-priced risk thingy over the last decade, especially the last 5 to 6 years.
What are your thoughts on the solution to this now? Clearly the government is trying to reinflate this thing again. The problem, to me is that the actual solution to the problem,(de-leveraging, losses) is being attacked as if IT were the problem, instead of being seen as the cure.

static

joe armendariz said...

I agree with Judy. Bring back an orderly and ethical international monetary regime.

Anonymous said...

I also agree with Judy Shelton. Our central bank, enabled by a complicit Congress continues to debase our currency, forcing everyday people to expose themselves to ever more complicated "investment" schemes in an effort to preserve their wealth. The Federal Reserve has failed horribly in its primary mandate--maintaining stable prices by controlling the money supply. Once again, as over thousands of years, the urge to inflate a fiat currency is irresistible. Hyper-inflation is the terminal stage of any fiat currency. Gold has replaced every fiat currency for the past 3000 years. Let us give the "Fed" a run for its money by removing ALL barriers to competing currencies and watch Gesham's Law in reverse.

Piltdown Man said...

Whoever would seek to criticize Ms. Shelton for advocating a return to the gold standard is a pompous nincompoop - period. This crisis is closely related to the flaws endemic to fiat currencies.

Anonymous said...

I agree with Judy. The flaws in fiat money was the major contribution to this crisis. The Austrian school predicted this. Let's return to the international gold standard and the only form of honest money.

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