Forty years on
G20 ministers and governors meet again in Washington this week, in preparation of the Cannes summit of November. Unavoidably, the agenda contains a large portion of déjà vu: global imbalances, macropolicy coordination, financial reform, all themes commented repeatedly in this Monitor. But there are also news; in particular the suggestion, in the background, by the French presidency to revisit the international monetary system (IMS). As we approach the 40th anniversary of Nixon’s fateful decision (15 August 1971) to suspend the dollar convertibility into gold, this rethinking is also chronologically attractive. Here are some personal views on this issue – Bruegel is preparing an extended report, in cooperation with CEPII, that will appear later this year.
For more than a century, the creation and use of money in all countries rested on three premises. The first is that money is a public good: it serves a collective purpose (fostering general welfare by facilitating exchanges) and hence should be subject to collective will. Free banking, the competitive approach to monetary management proposed by the Austrian economist Friedrich Hayek, had occasional supporters but was never applied in practice, at least in this century or the last. The second is that to avoid inflation, deflation and other evils the overall quantity of money needs to be carefully regulated; this is the core function assigned to modern central banks. Finally, the third criterion is that central banks should be ready at times to provide money directly to individual financial institutions, to prevent or contain financial crises. This “lender-of-last-resort” function also needs to be regulated, to avoid misuses and excesses.
In the global economy countries produce and save, sell and buy goods using money, sometimes accumulate debts and may even go bankrupt, very much like individuals do. Hence it is surprising that those principles are not applied also to the international monetary system – the set of rules and conventions that govern the use of money for international transactions. In today’s system, and indeed ever since the collapse of the post-war monetary order in 1971, international means of payments are created by individual countries (mainly the US, but increasingly others as well) as a by-product of their domestically oriented monetary policies. Global money creation is the sum of uncoordinated decisions by individual countries. Forms of lending-of-last-resort, directed at individual countries in financial difficulty, do exist in the toolkit of the International Monetary Fund, but are insufficient and regarded as too expensive and risky by potential users. To hedge against imponderables, many emerging countries have accumulated in recent years gigantic and inefficient amounts of international reserves.
After decades of disregard, the reform of global monetary arrangements is back at the center of international economic negotiations. The road is uphill; while few would object that the status quo had something to do with the financial excesses, fulled on deficits and monetary laxity, that led to the crisis, much more difficult is to identify alternatives and agree on concrete steps. But the months ahead offer an opportunity.
Some proposals on the table have value. Removing exchange rate rigidities and capital restrictions, broadening the content and use of the SDR, building financial safety nets, may all help improve the present system and facilitate a transition to a more balanced, less US-centric, “multipolar” one. But multipolarity in itself cannot cure the lack of policy discipline and the weak governance of global monetary conditions that are among the identified deficiencies of the status quo. Central in the debates that led to the Bretton Woods agreements in 1944, this concern seems to have been lost in today’s discussions. Free banking-type arrangements are unlikely to offer, in global monetatry arrangements, a more convincing solution than they have at the domestic level.
History is stop-go process; accelerations and reversals alternate amidst obstacles and one-time opportunities. Let’s give this crisis a chance to bring lasting improvements in international monetary relations, after forty years of standoff.