The latest information on the world economy
Sign up for myFT Daily Digest to get the world economic news first.
It’s been 50 years since President Richard Nixon announced to the world that Washington would no longer exchange US dollars for gold. Fixed at $ 35 per ounce, gold pegs were central to the design of the post-war Bretton Woods system at fixed exchange rates. The “Nixon shock” removed that pillar, and the system was soon completely unleashed, entering a period of volatile exchange rates and high inflation chaos.
No one should cry because of the gold standard. Keynes’ famous dubbed “barbaric relic” has been postponed due to retirement. Bretton Woods worked as long as it worked, not because of the arbitrary price of metal, but because of the collective commitment to stability. Also, the Nixon shock was not unprecedented. The $ 35 peg itself was founded after Franklin Roosevelt broke the previous gold peg and devalued the dollar. Nostalgia for gold is misguided and misguided.
But that does not apply to the broader aspirations of the Bretton Woods structure. Global monetary and monetary policy since 1971 has been a quest to restore the lost stability that the system provided. It took a quarter of a century for the central bank to determine and master inflation targeting as a policy strategy to ensure stable domestic prices. Even its ultimate success did not guarantee broader financial stability, as the asset bubble and financial crisis since the 1980s have shown.
International stability is becoming more elusive. Economists and policy makers have gained a better understanding of floating exchange rates as the “non-system” has progressed since 1971, but few are completely satisfied with them. They do not achieve the financial independence they once promised, nor do they isolate the real economy from financial shocks. They sometimes amplify them. Today’s very large cross-border capital flows make it even more true.
The government has pursued various strategies to curb exchange rate fluctuations. The biggest leap was made in the EU’s single currency zone. Currency unification is impractical for other economies, and formal pegging systems for separate currencies have proven to be repeatedly infeasible.
But even the largest economies need to continue to curb currency fluctuations, from the 1985 Plaza Accord to curb the dollar’s rise to Washington’s long-standing concerns about currency manipulation by others and Beijing’s yuan control. I think there is.
We may be accused of living a less stable life than we would like. Bretton Woods relied on tight control over cross-border capital flows, which is irreversible. But the half-century quest for a Bretton Woods alternative for our time can go a step further.
Closer coordination of macroeconomic policy It helps mitigate the instability caused by foreign exchange markets that anticipate price inconsistencies and deficit dynamics between countries. And the most relevant Bretton Woods feature today is the least memorable feature. Domestic credit regulation It helped isolate regional economic growth from cross-border financial pressure. Policy makers are rediscovering this in the form of “macroprudential regulation.”
Fifty years later, gold remains attractive, and now there is a false promise that crypto assets can be more stable than central bank funds. The true lesson of the end of Bretton Woods is the opposite. Gold and its equivalent digital are no match for wise regulation and trust between countries.
A 50-year quest for monetary stability Source link A 50-year quest for monetary stability