by Murray Rothbard
(Contents by Publication Date)
New International Monetary Scheme
Ever since the Western world abandoned the gold coin standard in 1914, the international monetary system has been rocketing from one bad system to another, from the frying pan to the fire and back again, fleeing the problems of one alternative only to find itself deeply unhappy in the other. Basically, only two alternative systems have been considered: (1) fiat money standards, each national fiat currency being governed by its own central bank, with relative values fluctuating in accordance with supply and demand; and, (2) some sort of fixed exchange rate system, governed by international coordination of economic policies.
Our current System 1 came about willy-nilly in 1973, out of the collapse of Bretton Woods System 2 that had been imposed on the world by the United States and Britain in 1944. System 1, the monetarist or Friedmanite ideal, at best breaks up the world monetary system into national fiat enclaves, adds great uncertainties and distortions to the monetary system, and removes the check of external discipline from the inflationary propensities of every central bank. At worst, System 1 offers irresistible temptations to every government to intervene heavily in exchange rates, precipitating the world into currency blocs, protectionist blocs, and "begger-my-neighbor" policies of competing currency devaluations such as the economic warfare of the 1930s that helped generate World War II.
The problem is that shifting to System 2 is truly a leap from the frying pan into the fire. The national fiat blocs of the 1930s emerged out of the System 2 pound sterling standard in which other countries pyramided an inflation of their currencies on top of inflating pounds sterling, while Britain retained a nominal but phony gold standard. The 1930s system was itself replaced by Bretton Woods, a world dollar standard, in which other countries were able to inflate their own currencies on top of inflating dollars, while the United States maintained a nominal but phony gold standard at $35 per gold ounce.
Now the problems of the Friedmanite System 1 are inducing plans for some sort of return to a fixed exchange rate system. Unfortunately, System 2 is even worse than System 1, for any successful coordination permits a concerted world-wide inflation, a far worse problem than particular national inflations. Exchange rates among fiat moneys have to fluctuate, since fixed exchange rates inevitably create Gresham's Law situations, in which undervalued currencies disappear from circulation. In the Bretton Woods system, American inflation permitted world-wide inflation, until gold became so undervalued at $35 an ounce that demands to redeem dollars in gold became irresistible, and the system collapsed.
If System 1 is the Friedmanite ideal, then the Keynesian one is the most pernicious variant of System 2. For what Keynesians have long sought, notably in the Bernstein and Triffin Plans of old, and in the abortive attempt to make SDRs (special drawing rights) a new currency unit, is a World Reserve Bank issuing a new world paper-money unit, replacing gold altogether. Keynes called his suggested new unit the "bancor," and Harry Dexter White of the U.S. Treasury called his the "unita."
Whatever the new unit may be called, such a system would be an unmitigated disaster, for it would allow the bankers and politicians running the World Reserve Bank to issue paper "bancors" without limit, thereby engineering a coordinated worldwide inflation. No longer would countries have to lose gold to each other, and they could fix their exchange rates without worrying about Gresham's Law. The upshot would be an eventual world-wide runaway inflation, with horrendous consequences for the entire world.
Fortunately, a lack of market confidence, and inability to coordinate dozens of governments, have so far spared us this Keynesian ideal. But now, a cloud no bigger than a man's hand, an ominous trial balloon toward a World Reserve Bank had been floated. In a meeting in Hamburg, West Germany, two hundred leading world bankers in an International Monetary Conference, urged the elimination of the current volatile exchange rate system, and a move towards fixed exchange rates.
The theme of the Conference was set by its chairman, Willard C. Butcher, chairman and chief executive of Rockefeller's Chase Manhattan Bank. Butcher attacked the current system, and warned that it could not correct itself, and that a search for a better world currency system "must be intensified" (New York Times, June 23, 1987).
It was not long before Toyo Gyoten, Japan's vice-minister of finance for international affairs, spelled out some of the concrete implications of this accelerated search. Gyoten proposed a huge multinational financial institution, possessing "at least several hundred billion dollars," that would be empowered to intervene in world financial markets to reduce volatility.
And what is this if not the beginnings of a World Reserve Bank? Are Keynesian dreams at least beginning to come true?