In this weekend’s edition of the Wall Street Journal, there is an enlightening interview by Judy Shelton with the “father of the euro,” Columbia University professor and Nobel Prize winner Robert Mundell. Here’s a link: “Currency Chaos: Where Do We Go From Here?” Reading the full article requires a subscription, though I must say that my online subscription does me no good, as the computer never seems to recognize me, and the technical assistance I have received hasn’t helped much (though I haven’t pursued it too strongly, either, so don’t think ill of them). I read the interview in the print version.
Here are some choice quotes and comments for the interested reader. Some of it is quite a history lesson for those who don’t understand how the current state of international currency affairs came to be as as it is.
When asked by Ms. Shelton, “What is wrong with the global economy today? How do we fix this monetary mess?” He responds:
“The problem started before World War I. The gold standard was working fairly well. But it broke down because of the war and what happened in the 1920s. And then the U.S. started to become so dominant in the world, with the dollar becoming the central currency after the 1930s, the whole world economy shifted…
“[The dollar] became the anchor for the Bretton Woods fixed exchange rate system after World War II. The price of gold was fixed at $35 an ounce in 1934, but by the time the U.S. got through the Korean War, the Vietnam war, with all the associated secular inflation, the price level had gone up nearly three times.
“Gold became very undervalued; European countries traded in dollars for gold until the U.S. lost more than half its stock. The U.S. went off gold in 1971, under Nixon, and nobody else has gone on it again.”
For those who may not realize, Mr. Mundell is a “hard-money” advocate, who does not believe that letting exchange rates float around is healthy for the world economy.
Prodded for more explanation about the the root cause of our current chaos, he summarizes:
“The system broke down not because of fixed rates. Fixed exchange rates operate between California and New York… the system broke down because there was no mechanism to keep the world price level in line with the price of gold.”
His comment about California and New York–two states with distinctly different yet enormous economies and individual sets of policy makers which are tied to an identical currency, so that the “California dollar” is at a fixed “exchange rate” with the “New York dollar” (since they are, in reality, the same U.S. dollar)–makes a great deal of sense coming from him, given what he worked to help create with the euro. And, for what its worth, I agree with him: the loss of a standard–gold–for the world’s currencies meant that the standard became confidence: confidence in the U.S. (My high school history teacher had this perfectly right: Thank you, Mr. Galbreath!) Why is the world unstable now? Because what backed the currencies of the world, confidence in the U.S., has been shaken utterly.
Mr. Mundell makes a condemning comment about the leadership of the United States–both the current leadership and that of the past several years, if not the last couple of decades or so. When asked if there needs to be a new international monetary order established and if the U.S. should offer some proposals, he replies:
“I don’t think the U.S. has any ideas, they don’t have strong leadership on the international economic side… There hasn’t been anyone in the administration for a long time who knows much about the international monetary system.”
Later: “To be fair, America’s position is not nearly as strong now [as it was under FDR and Treasury Secretary Henry Morganthau in the 40s]. But what has disappointed me is the reluctance of the U.S. to take into account this big movement in the rest of the world to do something about restoring stability to the system. They ignore it, as if the dollar’s exchange rate is a mere domestic matter.”
I agree that America’s monetary policy is startling in its ignorance and/or arrogance, and it has been true under administrations on both sides of the political aisle. It reflects the arrogance of U.S. Treasury Secretary under Nixon, John Connolly, when he famously told some nervous Europeans that the dollar was “our currency and your problem.” However, even though America no longer speaks from the same position of secure financial strength, we still treat the dollar is if it is merely our currency–that is, we can do with it whatever we please–and the problem of others–that is, that what we do with it cannot easily translate into problems for us. I’ve even read serious, educated, degreed economists saying–publically, mind you, and in print–that any debt we work up is no big deal because we can always print more money. Seriously. The guys that are supposed to know better. The ghost of Connolly lives.
However, it is no longer just “their problem.” We need international favor and cooperation (well, we do since we aren’t even pretending to try and garner God’s any longer, but y’all know how I feel about that). As Tennessee Williams might have described the situation, we are “dependent on the kindness of strangers.” The U.S. is becoming utterly dependent on its “lovers,” who will, ultimately, abandon it (cf. Jer. 30:14). In fact, that’s the trouble America is having in trying to get China to let its currency, the Yuan and Renminbi, float in a direction better for us. China is essentially looking the U.S. in the eye and replying: “It’s our currency and your problem.”
In the interview, Mr. Mundell tells Ms. Shelton that the best thing the U.S. could do to turn around its economy is to seek “Pro-growth tax policies, [and] stable exchange rates.” As for stabilizing exchange rates, he suggests one action in particular: “The most important intiative you could take to improve the world economy would be to stabilize the dollar-euro rate.” He calls the euro the “counter-dollar,” the only legitimate contender for a global currency currently available. Together, he points out, the dollar and the euro represent 40% of the world’s economy, and stabilizing them — making a real standard of them — would make a real difference.
Mr. Mundell also points out the inherent stupidity in the approach of the Fed (though he does say that the Fed officials, themselves, are stupid) and it tendency to keep an eye on the inflation index as a means of measuring the risk inherent in their choices, when it lags horribly (“months” behind) and when the value of gold and the dollar exchange rates are immediate measures of the inflationary risk (if, perhaps, rough), and they tell quite a startling tale.
If you can, read the interview yourself. I certainly may have misinterpreted something Mr. Mundell said, and it’s better to get it from the horse’s mouth (or the editor and interviewer’s version of the horse’s mouth, which is still closer to the source than I am). Economics may be a dry subject for some, but it has powerful personal impact.
America’s self-confidence will, eventually, prove to be sustained by nothing but vapor and smoke. To those who still pridefully believe that the dollar is our currency and other countries’ problem, God says He will “break the pride of your power” (Leviticus 26:19). To those who think that we can build a solid and stable basis of national wealth and prosperity by becoming the world’s greatest borrower, He says “the borrower is the slave of the lender” (Prov. 22:7 ESV) and that “[t]he alien who is among you shall rise higher and higher above you, and you shall come down lower and lower. He shall lend to you, but you shall not lend to him; he shall be the head, and you shall be the tail” (Deut. 28:43-44).
And to those who think that gold and silver will prove a refuge from the times to come, He says, “They will throw their silver into the streets, and their gold will be like refuse; their silver and their gold will not be able to deliver them In the day of the wrath of the LORD; they will not satisfy their souls, nor fill their stomachs, because it became their stumbling block of iniquity” (Ezek. 7:19). Why? Because the problems of the United States are not ultimately “political” and “economic” in nature. They are spiritual. And they involve more than unwise monetary policy. They involve sin.
Well, today has become far too beautiful outside to continue writing about economics! Go get some sun. You’re too pale. 🙂 And have a wonderful week.