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IV The Power of Global Finance

Under present arrangements, finance too often acts as a malevolent force, rewarding private sectional interests at the expense of the public interest. This is because the globalisation of markets has run ahead of our power to control them. Properly harnessed, global finance could be, again, an enormously powerful force for good. Designing such a harness is the most important challenge we face.

(Numbers refer to Chapters of the book)

12. One Hundred years of Currency Plans: This Chapter argues that we can learn much from previous generations of thinkers about international monetary issues. Brief surveys of the thought of leading economists from Fisher to Keynes to Hayek are provided. I do believe that intellectual groundwork and a period of consensus building will be needed to build momentum for a regime change.

2013 Update: No progress. The economics establishment and central bankers are hostile to reform, as is the US Treasury. They ignore the fact that the great classical economists all took for granted the existence of one monetary standard for the civilised world and would have been horrified by the slide towards monetary anarchy. They also neglect the geo-political risks. Major monetary mismanagement always leads to political fragmentation, as in the 1930s. The plight of the eurozone, the possible departure of the UK from the EU, and the frustration of China and other emerging powers with current arrangements, which privilege existing great powers, can all result in deep geo-political fissures.


13. The Choice of the Standard: Despite the indifference or hostility of a majority of mainstream economists, a number have proposed reforms. Nobel Prize-winner Joseph Stiglitz led a UN Commission of experts and issued a thoughtful report on reforming the system (with British economist Charles Goodhart as one of the panel); Ronald McKinnon continues to urge the merits of a refurbished dollar standard; Allan Meltzer believes that a global monetary standard, an objective he favours, can be reached if each country were to agree to follow common policy objectives; Richard Cooper has updated his vision of a currency union among advanced countries; Nobel Prize winner Robert Mundell campaigns for monetary union between the dollar, euro and yen (and eventually yuan) areas; Warren Coats’s proposal for a “Real SDR” standard remains on the table, as do the numerous proposals for a return to a form of gold standard championed by economists such as Lawrence White, Judy Shelton and Kevin Dowd (References and brief outlines of their proposals are in “The Money Trap”).

These economists come from a wide range of economic traditions and schools of thought, and would disagree on many issues, but they all have one thing in common: they understand the case for a monetary standard.

2103 Update: In the US the running for international reform continues to be made by advocates for a return to gold. Activist Lewis E Lehrman has a new book ”Money, Gold and History” written in honour of the Paul Fabra, leading French commentator and author, as well as a new edition of his book, “The True Gold Standard”. Special mention should be made of the Cato Institute, whose journal and annual monetary conference serve as splendid platforms for high-level debate. Elsewhere, China has stepped up the rhetoric, with the official news agency calling for action to “de-Americanize” the world economy. Justin Lin, Chinese economist and former chief economist of the World Bank, has published an interesting book, “Against the Consensus”, which attributes the crisis to faults in the international monetary system and calls for thorough-going reform (Lin favours a system based on what he calls p-gold – see my comment).

14. The Leap to a New Monetary Order: To enable it to serve society properly, money should be restored to its proper place in a constitutional realm above the cut and thrust of day-to-day politics. It is necessary to move beyond inflation targeting, which reflects a superficial view of the role of money in the economy. Drawing on the insights of Nobel Prize Winner James Buchanan and the public choice school I argue in Chapter 14 for a new constitutional settlement – involving an agreement on meta rules for money and finance – among the authorities of the principal monetary areas.

2013 Update: the situation has regressed to an infantile preoccupation with the next statement from central bankers. A mere hesitation, or muddled sentence from the likes of Ben Bernanke, can trigger major convulsions in the market, as happened in May 2013 when he seemed to be signalling the beginning of “tapering” of Fed purchases of government bonds. Such are the absurdities to which current anarchy leads.

Monetary policy is driven by desperation, not reason. As Brendan Brown of Mitsubishi UFJ Securities points out in a recent letter to subscribers, the weakness of business investment, even in the US, shows, all this monetary manipulation is still failing to persuade business people to look at the future optimistically: “How could they when they know the endgame is likely crash and recession?” Mohamed El-Erian makes much the same point in a recent contribution to the “Project Syndicate” website – companies doubt the sustainability of current policies, and hold back on longer-term investments.