Monday, November 8, 2010

Bretton Woods III?

In the lead-up to the G-20 meeting, Robert Zoellick, president of the World Bank, posted an op-ed in the Financial Times this weekend in which he called for stronger international monetary cooperation, of a kind that was attempted in the 1970s and 1980s (most famously in the Plaza Accords). It is perhaps not surprising that his example of how the U.S. ought to promote such cooperation is the second Reagan administration, when policy was led by James Baker, for whom Zoellick worked at the time.

What is quite puzzling, however, as others have noted, is that Zoellick calls for "employing gold as an international reference point of market expectations about inflation, deflation and future currency values" i.e. some form of modified gold standard. Brad DeLong, calling Zoellick a candidate for the "Stupidest Man Alive Crown" points out that he is quite mistaken about the current role of gold (Zoellick argues that in some vague way it already serves as a currency).

Equally odd, however, is Zoellick description of the current "monetary system". He calls the current situation "Bretton Woods II", and says that it was "launched in 1971." Somehow, I doubt most people would consider the unilateral, last-resort policy option of suspending the dollar's gold convertibility by Richard Nixon equivalent to the "launch" of an "international monetary system".

Not only that, it is not a puzzle why the original Bretton Woods system, which really was a system, fell apart: the successful operation of a monetary system requires a monetary base whose supply increases apace with economic growth, and in which people have confidence. Gold by itself cannot meet those conditions. The Bretton Woods combination of gold plus dollars did so only temporarily. I don't see how anyone could expect more success for a combination of gold plus multiple currencies (which would have to maintain fixed parities relative to one another and to gold, if gold is to have any function in the system other than the speculative hedge function it has today).

The final oddity about Zoellick's op-ed is that Martin Wolf, in his blog at the very same newspaper, the Financial Times, had given a quite thorough run-down of the issues that make a return to the gold standard today utterly infeasible. Even if Zoellick does not read the FT's blogs himself, you'd think that someone either on his staff or at the FT would have warned him that not only was he being foolish, but Wolf had pre-emptively pointed out just how foolish.

No comments:

Post a Comment