The U.S. Republican Party has now officially endorsed the idea that a commission should study “possible ways to set a fixed value for the dollar.” This seems a sign that the idea of a hardened monetary policy has re-entered the mainstream of discussion. Bravo.
Bank of England
A little more than a half year ago the Bank of England issued its Financial Stability Paper No. 13, reviewing the global financial crisis from the point of view of the “international monetary and financial system.” The authors, Oliver Bush, Katie Farrant, and Michelle Wright, concluded that the IMFS now in place, the one “in which countries are free to choose whether to fix or float their exchange rate” vis-à-vis other countries’ currencies to suit their own domestic agendas, is a failure. It has “performed poorly against each of its three objectives at least compared with the Bretton Woods system,” that is, as compared with the form in which the gold standard was restored after World War II, a system that lasted until the presidency of Richard Nixon.
The “three objectives” of an IMFS, as these authors see it, are: internal balance (each country’s pursuit of non-inflationary economic growth); allocative efficiency (the ability of capital flows to respond to price signals); and financial stability (the avoidance of crises and their costs). As they see it, the Bretton Woods system sacrificed some allocative efficiency to serve the other two goals. Stronger or more direct sorts of gold ties tend to give up internal balance to achieve allocative efficiency and financial stability. Soft money, “today’s system,” fails all three tests.
With all due respect to those three authors, it doesn’t take great acuity to recognize by now that the idea of fiat currencies floating/sinking against one another all the time, since Nixon’s originating fiat, hasn’t been history’s greatest idea. It has one benefit. It sometimes does assist the quick-witted in their pursuit of alpha. Much of what is called “global macro” in the hedge fund world might be better described as monetary-policy arbitrage.
The creation of the euro itself, and of the European Exchange Rate Mechanism before that, was in large part a response to the risks created by the post-gold, post-Nixon system. Consider the rich opportunity this ERM in turn offered to George Soros, who knew how to play it. But policy, if it is sensible, isn’t created to make life easy for arbs.
Take The Atlantic. Please.
Nothing quite so recommends a gold standard, or some alternative system of currency hardening, as the increasingly absurd arguments of those who would defend the current system of competing national fiats.
The Atlantic this week presented us with Matthew O’Brien’s ruminations on why “the gold standard is the world’s worst economic idea.” O’Brien’s prose is illustrated by an old political cartoon of William Jennings Bryan holding the figurative “cross of gold.” So let’s think about Bryan.
Bryan was surely right in one sense: he preferred that inflation be congressionally mandated, open-air, and voted-upon through the flagrant means of bimetallism rather than that it be more subtle and orchestrated in smoke filled rooms. In a world dominated by Bryan on the one side and Morgan on the other, then, Bryan had his points. But letting Morgan run things wasn’t a real hard money policy, just as bailing out AIG isn’t a real free market policy. As to inflation: if something is wrong in itself then doing it out in the open, on the floors of Congress, is still wrong.
Just beneath that cartoon, O’Brien treats us to this breathtaking assertion: “The greatest trick Ron Paul ever pulled was convincing the world that the gold standard leads to stable prices.”
The Thing about Prices
I’m not aware that Ron Paul, or anyone else, has ever said that the gold standard leads to stable prices. Indeed, the stability of prices, when brought about by central bank manipulations, reduces rather than enhances systemic stability. The word for a system that needs prices to stay the same over time isn’t stable: it’s brittle.
The great thing about prices, when they are set by the free movement of supply and demand, is that they convey information. O’Brien might want to read a famous essay about a pencil.
The simple pencil envisioned by Leonard Read was created out of wood that first grew in Oregon, cut and transported through the use of a variety of gear to a mill in California, added to a column of “lead” (graphite) first mined in Sri Lanka, or Ceylon, as Read of course called it in 1958, and so forth. There is no better way to co-ordinate the activity of all the people and institutions around the world involved in the creation of this pencil than through the free rise and fall of prices in response to genuine supply and demand.
The system works best when those prices have unambiguous meaning. Their rise and fall, their instability if you will, is integral to their meaning, just as instability of a sense is integral to freedom. It is the very purpose of central bank activity to confuse that meaning, to add static to the transmission of information valuable to the productive process.
The glorification of static over signal, it seems to us, is the world’s worst economic idea.