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A Debate with Allan Meltzer (Part 1)

This post and the next contain a recent email exchange that we have decided to make public

Professor Allan Meltzer debates international monetary issues and The Money Trap with Robert Pringle


On 3/14/2014 12:57 PM, Robert Pringle wrote:



Thinking further about the international monetary system, I now find it difficult to conceive monetary stability being established in one country alone – even if that country is the US. This is to me the main lesson of the crisis and why I have changed my mind. I would welcome your view.




Allan replied:

Yes, international stability would be a big improvement.  But it isn’t possible without better domestic policy–limits on budget deficits and money growth.  If forced to choose, I would choose limits on deficits.

Notice, please, that Germany chugs along year after year without world currency stability.And Japan has for decades gone its own way, remaining stable while growing very slowly.



On 3/15/2014 9:30 AM, Robert Pringle wrote:

Glad we agree on need for international stability. I feel it is a prior condition of domestic stability in any country. Interestingly, Paul Volcker and Jacques de Larosiere understand this – in the past two weeks both of them have endorsed the thesis of my book in public. Yet few economists do.


I would say Germany and Japan have been among the chief victims of the international monetary anti-system having been repeatedly destabilised by huge swings in exchange rates, political pressure from a profligate US, and inability to impose discipline on deficit countries, leading to accumulation of depreciating dollars.




On 15 Mar 2014, at 16:24, Allan  Meltzer wrote:

You know that I favor an international agreement.  But no agreement can work without fiscal restrictions.  That should be obvious from the ECB, where the countries had an international agreement that failed to enforce fiscal discipline on the participants.  Unlike the gold standard, the ECB treaty did not permit suspension in a crisis.  It may survive, but it has not worked satisfactorily.  The only major question now is how much additional Germany will agree to pay in order to make the system survive.


A common currency works in the US because we have fiscal transfers.  The gold standard worked for a long time because it permitted suspension during troubled times.


No international agreement on currencies can work satisfactorily if there is not a PRIOR fiscal agreement.




On 15 March 2014 at 1:07 PM, Robert Pringle wrote:

Yes, fiscal rules plus – I would add – a credible no  bail-out rule. My argument is that fiscal rules may be easier to impose and adhere to if part of an international agreement to preserve free trade and free capital flows and capture the gains from globalisation. Fixed exchange rates can be again part of the mechanism to enforce fiscal discipline. It is hopeless to try to “coordinate” national policies ex post – there has to be something in place that governments know they will have to defend/stick to ex ante. Countries lack the political capacity/incentive to observe fiscal discipline on their own. We have discussed this before.


Further, the US would get a good deal if it negotiated a deal now. If it waits 20 years, it will be (I expect) in a weaker position.


On EMU, remember the poor experience many had with floating – there was a strong desire for more stability.




On 15 Mar 2014, at 19:14, Allan Meltzer wrote:

We agree on many things.  Recall that I have had a proposal for increased exchange rate stability since the mid 1980s.  It depends on markets to enforce the agreement, as the gold standard did.


The big change from the gold standard, as Bretton Woods demonstrated, is that voters have learned that monetary authorities can increase employment.  I see much evidence that most publics will trade off exchange rate stability for more employment, even if the latter proves to be only temporary.   That is the hard fact that you or I or any proposal has to overcome. In your words “governments lack the capacity.”  I say the voters want governments to put “full employment” ahead of any other objective.   Alas, that remains true even when governments do a poor job of providing full employment.


My proposal would be voluntary for each government.  The markets could punish them by devaluing if the government expands too much to maintain the exchange rate.  Do you think  governments would choose to restore the exchange rate?  Or do you agree with me that they would welcome devaluation as a way of increasing employment?


Your proposal ignores the public’s demand for more jobs.  That’s why Bretton Woods failed.  That’s why the ECB failed.  People can see that Sweden, Britain and others outside the fixed exchange rate system can do better at increasing employment than those in France, Italy, et al. inside the system.


I, too, would like greater international stability.  But I can see that central banks seem determined to respond to very short period data,  Any program emphasizing stability requires them to act according to medium- or long-term objectives.  They are unwilling to do that.  They may assert their independence, but an independent central bank does not finance a large part of the government deficit.


Everyone who knows anything about data knows that the monthly unemployment rate is a noisy number subject to very large revisions.  Yet, the Federal Reserve responds to it almost slavishly.   Are they stupid?  Or politically driven?


Should we have this discussion in public?



 The debate continues in Part II….