Our Three Monetary Futures — Haven’t Changed Much Since 1944

(This item originally appeared at Forbes.com on May 2, 2017.)



One of the interesting themes that I took away from attending the Kemp Foundation’s Kemp Forum on Exchange Rates and the Dollar, on April 20 in Washington DC, was that there are three clear options for our world monetary future. These three options are much the same as was presented in a similar conference, held 34 years earlier, in 1983. And, they were the same three options that were on the table at Bretton Woods in 1944. Although people might favor one option over another, nevertheless, they seem to agree that there are three main options to choose from.

This is good, because it simplifies the cacophony of discussion regarding monetary issues. We don’t have to discuss everything under the sun.

The three options are: 1) floating currency chaos; 2) a unified system based on some floating-fiat central bank, exemplified by the eurozone and ECB; 3) a unified system based on gold.

By a “unified system,” I mean a system in which currency exchange rates are fixed. This is already common: most of the governments in the world fix their currencies’ exchange rates to one of the major international currencies, such as the dollar or euro. They form “currency blocs.” (A shared currency, like the euro, is a variant on the principle.) These currency blocs are often formed via ill-designed “currency pegs,” rather than reliable currency boards, and, as a consequence, often fail. But, nevertheless, a fixed exchange rate is the policy goal, even if it is not always achieved.

The world always had a “unified system,” based on gold and silver, and then, by the late nineteenth century, based on gold alone. The whole world was one “currency bloc” based on gold. Exchange rates were fixed.

A unified system based on some central floating-fiat currency, managed by a world central bank, is much the same idea, but on the “PhD standard” rather than the “gold standard.” The euro and ECB are an example of the principle. If all the countries in the world linked their currencies to the euro, via a currency board for example, we would have Option Two.

“Floating fiat chaos” – many currencies going up and down independently and chaotically – is our present state of affairs. It is generally regarded as problematic and destructive, which is why most governments avoid it as much as possible, preferring instead to belong to some shared currency bloc. One purpose of the euro and eurozone was for Europe to achieve a way to avoid this mess.

By the end of the 1930s, the world had largely descended into “floating fiat chaos.” A series of devaluations during that decade led to floating currencies worldwide, and various capital controls. This was such a mess that, at a meeting at Bretton Woods, New Hampshire in 1944, the Allied governments decided that it was not acceptable for the postwar period.