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A Debate with Allan Meltzer (Part II)

On 15 March, 2014, at 22.24 Robert Pringle wrote:


It is necessary to agree on many things to have a useful discussion, and it is not surprising we do as my thinking has been much influenced by yours for many years. In a sense I am trying to reconcile my understanding with what I have learnt from Mundell, which is difficult as you have different underlying assumptions and ways of viewing the economy. Never mind, we can cut through the treacherous theoretical minefield to get at practical policy issues we face.

It would be useful to list sometime the big issues on which we agree and why.

I too agree on the need to have a largely voluntary system, with a safety valve as in the gold standard. And market enforcement. But you would need a core of countries to get it going. I do not believe in Hayek’s currency competition – the State has to agree on the definition of the monetary standard, but you can have free competition among producers of money to that standard.

I think you should have the minimal state – in fact tolerate quite a lot of anarchy – politically. But you need a unified currency. Money should not form part of the struggle because it is a zero sum game and because any central bank or money creating centre is always controlled by powerful  groups, as today. (I fear crony capitalism is a mortal threat to democracy, especially in the US; see Luigi Zingales’ book “A Capitalism for the People: Recapturing the Lost Genius of American Prosperity,” .) The trouble is Republicans tend to have a knee-jerk reaction whenever banks are criticised. Breaking up the banks and defending the US constitution against crony capitalists should be central to the Republican agenda. (You probably deal with that in your book , Why Capitalism?, which I must re-read).

Of course there will always be competition and fights over resources, territory, positional goods, gold, intellectual property.  But as in the Roman Empire you can have this take place within a common monetary area where the definition of money does not form part of the struggle.

The public learnt in 1950-75 that pre-election booms were likely to end in busts and to accept the attempt to make central banks independent. This was a step in the right direction. I know it is likely to fail as central banks abandon rule-based policies in favour of policies that suit powerful groups, but it shows progress in this direction is possible.


People can likewise learn that the power to devalue brings short-term gains to employment but has bigger long-term costs. EMU has been a setback, so far, and a public relations disaster for currency areas/monetary unions of all sorts. We know the reasons. They can be fixed, especially if applied at the world level.

Of course it is true by definition that (as Larosière says) nations are “not ready’ to abandon the pretence of national autonomy – if they were it would already have happened.  But suppose that the next crisis brings unemployment to 20%, further financial chaos, leading to nationalisation of the finance industry, extreme controls on personal freedom, state-directed investment, restrictions on travel and capital flows. And imagine that there is a plan to jump to a world money where we could have freedom in all these respects and restore capitalism  IF governments accepted limitations of national sovereignty –  and if there is a good plan ready – we would have a chance of selling it to a desperate world. And I think there WILL BE another worse crisis!

My reading of the Bretton Woods agreement is that it was pushed through by a few determined people who grasped a unique opportunity – there was nothing inevitable about it.

Of course would be delighted to have this in the form of a public conversation – honoured indeed.

I had a lovely talk with Paul Volcker in public last night. It has been posted on Central Banking’s website.


PS I attach a new paper on international money by Jacques de Larosière (to be published by Central Banking in a forthcoming issue).


On 17 March at16.02 Allan Meltzer wrote:

Dear Robert:

The point of Jacques paper with which I agree most  is on p4 where he writes:  “This is a world composed of states determined to preserve their own interest …without having to accept external constraints.  In sum a world of national objectives.”

I read that as saying that international coordination is a good idea, but it won’t work without PRIOR agreement on fiscal policy.


On 18 March at 11.02 Robert Pringle wrote:

Yet 18 developed countries have opted to enter into a currency union in Europe and are sticking with it including 12 of OECD’s member countries and several others have heavily managing exchange rates. In fact which are floating? UK, Canada, Australia, Japan? Korea? Mexico? Turkey……And how much effective autonomy does this give them?

I think international coordination is the wrong idea – unworkable; bringing national monetary policies into line with each other – as outlined in the first part of Jacques’ paper – and disciplining fiscal policies is not a matter of co-ordination but following international agreed rules – ex ante. As you say, PRIOR.



 Allan Meltzer’s closing statement (20 March 2014):

Robert Pringle and I have discussed the problem of achieving greater international financial stability.  Although we started from very different origins we converged to a small number of principles.  We agreed that the current non-system reduces growth and productive opportunities and that no international system can last without a major change everywhere but especially in the United States to less expansive, and less variable budget policies accompanied by more stable monetary policies.  We agreed also that countries should seek a voluntary system that, like the old gold standard, depends on market enforcement.

A remaining disagreement is over the ability of a single country, particularly a large country like the United States to achieve stability acting alone.   In his very good book, The Money Trap, Robert makes a strong case for his system.  I agree that a multi-national system has great merit.  I differ by believing that Germany, Japan and some others have achieved stability by following relatively independent policies.

I hope our exchange will stimulate others to discuss the requisites of much greater financial stability.

Allan Meltzer