A Global Currency Without Gold? Jude Wanniski July 1, 2003

Memo To: Robert A. Mundell
From: Jude Wanniski
Re: What? No Gold?

What a surprise. I see in Bob Bartley's column Monday that you have hosted another of your famous conferences at your Palazzo in Italy, this one addressing the question: “Does the Global Economy Need a Global Currency?” I’m of course happy that you are stirring up discussion on this important topic, Bob, but from Bartley’s report it seems there is there no "gold" anchor in your plan. Is this true? This means whatever unit of account you choose, it will still be subject to influences leading to inflation or deflation. When Bartley talks about anchoring the new Mundellian unit to the consumer price index instead of gold, is this your intent? I certainly hope not.

I'll just have to assume you are not putting all your cards on the table, planning to sneak gold into your system at some point. But what the heck, why fool around? If you don't put the gold anchor out front and center, why should you expect anyone else to do so. If the new currency you are cooking up is nothing more than the product of a global currency board, you are wasting what good years you have left. You got your Nobel Prize in 1999 for your work in creating the eurozone, but right from the start you failed to give adequate warning that unless the Eurobank targeted gold to keep the euro supply matching the euro demand it would flop around as it has. Bartley himself notes the euro was born at $1.18, floating to $0.83, then back up to $1.18. Was that trip necessary? The world economy will never get to a global currency without a central role for gold to anchor the system. You taught me that. For goodness sakes, Bob, grab the bull by the horns. None of us are getting any younger.

Does the Global Economy Need a Global Currency?
By Robert L. Bartley
The Wall Street Journal
June 30, 2003

SANTA COLOMBA, Italy--At this rural crossroads a short cab ride outside Siena's medieval gates, the question of the day is: "Does the Global Economy Need a Global Currency?"

"Yes," declares former Federal Reserve Chairman Paul Volcker, adding that the 15 or so onlookers here are maybe half the people in the world willing to entertain the question seriously. They include former Israeli central bank head Jacob Frenkel, former Argentine Finance Minister Domingo Cavallo and currency-board champion Steve Hanke. They've been gathered by Nobel Prize economist Robert Mundell for his 10th Santa Colomba Conference.

The first conference was held in 1971, three weeks after President Nixon's Aug. 15 announcement severing the link between the dollar and gold and breaking up the Bretton Woods international monetary system. This was also two years after young Professor Mundell spent $20,000 to buy the five-story limestone castle once owned by Pandolfo "Il Magnifico" Petrucci, who ruled Siena from 1487 until his death in 1512. Filled with endless shelves of books, it's now Palazzo Mundell, home and personal conference center for a man who's influenced the world not by Petrucci's notorious treachery and violence, but by the force of ideas. Mundell ideas motivated both the Reagan administration economic policies in the U.S. and the advent of the euro on this side of the Atlantic.

And if the euro can replace the franc, mark and lira, why can't a new world currency merge the dollar, euro and yen? The euro's recent recovery against the dollar almost certainly establishes its credibility as a permanent currency. While major eurozone economies remain troubled, practically no one so far is blaming the European Central Bank.

This suggests success for the grandest reform of all, a supra-national central bank. The ECB Executive Board and Governing Council could yet become political targets, of course, especially if much-discussed deflation actually sets in. But even with strikes in Germany and France, few politicians seek a way out in a little more inflation or currency depreciation; few complain about the loss of "monetary sovereignty."

World money, with a world central bank, seems a next logical step. The small band of dreamers decamped to the hills of Tuscany has always been skeptical of prevailing wisdom that the answer to all exchange-rate problems is "float." The euro was introduced at $1.18 to the dollar on Jan. 1, 1999, floated to below 83 cents in October 2000, and floated back to $1.18 this spring. In four years, that is, down 31% and back up 44%, with no obvious economic fundamentals to explain the float, er, gyrations.

In theory such monetary gyrations will disturb the real economy, and for whatever reason the years 1999-2003 have indeed been peculiar ones, with a tech-stock "bubble," a stock-market crash and a grudging world recovery. Over this time, too, U.S. monetary policy has tended toward the hyperactive, with the Fed tightening in 1999, easing dramatically in 2001 and just now cutting its open-market interest rate to an all-time low.

It's not easy to tease out the skein of causation connecting these events, but we do know from history that changes in the international monetary order have powerful effects, economic and often political. The Bretton Woods system of fixed exchange rates provided an international monetary stability that helped rebuild the world after World War II, for example. Its breakdown led to a decade of world inflation, an "energy crisis" and war in the Middle East.

With the advent of the euro, the world has evolved a system of currency blocs. The dollar and euro zones are perhaps each large enough not to be overwhelmed by currency changes--or at least, say, to delay the inflationary impact of the recent decline in the dollar. But around the world small and open economies--Argentina, for example--suffer profound economic and political shocks when the two currencies in which they trade gyrate by 30% or 40%.

For such nations in particular, the Mundell view stresses that floating exchange rates, recently a standard prescription of the International Monetary Fund, are not a policy but the lack of a policy. Under fixed rates, the central bank of a small nation devotes monetary policy to targeting the exchange rate with a larger neighbor; this is a policy. But a "float" simply takes away the anchor; for a policy you need another target--historically the price of gold, more recently some measure of the domestic inflation rate.

Under the second Bush administration, the United States has set out to establish itself as a positive force for order in the world, but it has been uninterested in the non-military side of world power, in particular the monetary leadership exercised so successfully by the U.S. during Bretton Woods or Great Britain during the 19th century. A world money would be an extraordinary boon to international stability.

When the U.S. gets ready to seize world leadership, Bob Mundell has a plan, based on the euro and looking toward the year 2040. To wit, all currencies convertible into an international money, the dey (dollar, euro, yen) or perhaps the intor. The supply of this currency under supervision of an international board; monetary gains from its issue split along IMF quotas.

As the Palazzo Mundell finale, he gave a banquet suitable for "Il Magnifico," with a suckling pig turning on an open spit and diners seated at a table guarded by twin suits of armor. He'll take his latest Santa Colomba conclusions to the IMF meeting in Dubai in September. Could it happen that his ideas will reach beyond a few dreamers in Tuscany to the real world? Well, with supply-side tax cuts and the euro, I've seen it happen twice before.

Mr. Bartley is editor emeritus of The Wall Street Journal. His column appears Mondays in the Journal and on OpinionJournal.com.
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