A great French monetary thinker recalled by a modern German central banker
Thinking about monetary and economic nationalism reminds one of the French economist Jacques Rueff (1898-1978). He strongly opposed economic fragmentation, nationalism and protectionism. He saw a good monetary system as a unifying force.
Shall we blame him for the euro? He did say, back in 1949, that money would lead European integration: “L’Europe se fera par la monnaie ou ne se fera pas.” But what he meant was: Europe would be built on sound monetary principles or not at all.
A little background on Rueff
As Christopher Chivvis describes in his excellent intellectual biography, “The Monetary Conservative: Jacques Rueff and 20th Century Free Market Thought”, Rueff reached a coherent political and economic philosophy early in life and remained loyal to it. His criticisms of the gold exchange standard sanctioned by the Genoa Conference and his belief in the virtues of the classical gold standard remained constant. He saw the gold standard as an essential element in a broad liberal order and identified the use of dollars as foreign exchange reserves as being at the heart of the problems of the international monetary system a generation before Triffin made this analysis famous in the Anglo-Saxon world. Rueff was motivated not by nostalgia but by hard-headed realism.
The gold standard was needed not in order to return to a lost golden age before World War I but to deal adequately with the realities of the post World War I period. His call for a return to the gold standard made him ‘part of a long tradition of monetary conservatism that had descended from France’s negative experience with fiat money’, first under John Law in the eighteenth century and then during the inflationary paper money experiment with assignats during the French Revolution. Keynes’s analysis appealed to politicians because it gave them a way of avoiding reality. Monetary manipulation could substitute for adjustment:
‘On a deeper level still, Rueff thought this weakness was evidence of the growing fragmentation of modern democracies, in which special interests had prevailed on politicians for protection and, in doing so, were destroying social cohesion and economic welfare’. (Chivvis, page 65)
Keynes and his followers had caved in to special interests as had French politicians who surrendered to the agricultural lobby’s pleas for protection.
Rueff carried this analysis through to the problems of the international economy after the Second World War. Like Hayek, Rueff believed that the price mechanism was the key to an efficient allocation of resources both nationally and internationally. To allow the mechanism to function on a global scale required imposing discipline on the world’s great powers. Only the gold standard could do that. During the 1960s, Rueff wrote innumerable articles in the Anglo-Saxon media as well as academic papers criticizing Bretton Woods and calling for a return to gold. He agreed with Triffin that the dependence of the system on the US dollar was a critical weakness, and that a continuation of the US payments deficit would trigger a crisis. But whereas Triffin saw the flood of dollars out of the US as necessary to meet the world’s growing demand for reserves, Rueff thought it caused an excessive increase in global credit, and was unsustainable: a collapse of confidence in the dollar could easily lead to a global banking panic and deflation. Thus Rueff opposed Triffin’s call for the creation of an international reserve asset. He thought it was unnecessary and would be abused.
At the time, Rueff’s views remained marginal. De Gaulle trumpeted them and was certainly influenced by them, but Rueff, who was ‘ a profound friend of the US’, was uncomfortable with de Gaulle’s confrontational tactics. When in 1966 Rueff called for a doubling of the gold price to allow a restoration of convertibility without a contraction of global credit, his views had no influence on events and in 1967 France abandoned its crusade for gold and agreed to the creation of the SDR.
Whatever influence Rueff had exercised – and he was never close to the Banque de France or French ministry of finance – waned further. Rueff then watched Bretton Woods collapse, as he had predicted, and in his last work, The Monetary Sin of the West (1972), he attacked the floating exchange regime that followed. This, he asserted, would encourage protectionism, raise uncertainty about international trade and investment and facilitate permissive monetary policies by all countries(instead of just the US), creating throughout the world ‘a breeding ground for recession and unemployment’. He foresaw disaster:
‘If I defended tirelessly for half a century the principle of monetary convertibility, it is not by any attachment to an orthodoxy that, in money matters, would make no sense, but because I love liberty and because I am convinced it is not a free gift’. (Chivvis, page 176, quoting Rueff)
Like Hayek, Rueff was deeply suspicious of activist monetary policies (children of the Keynesian revolution) permitted by the prevailing international monetary system – whether under the gold exchange standard or the post Bretton Woods periods.
He would have predicted the Global Financial Crisis and economic catastrophe of the past seven years – and would certainly have attributed it to the absence of an international monetary system worth the name. He would have been equally critical of the flawed construction of the euro.
He saw that the globalizing trading regime was fundamentally at odds with mercantilist monetary and exchange rate policies: one aspired to universality and openness, the other pointed to particularization and separation.
More generally, monetary nationalism, unleashed by the absence of a global standard for money, is inconsistent with a liberal order.
This claim is corroborated by everything that has happened in the run up to the Great Financial Crisis and since then. The analysis in my book is entirely based on this fundamental assertion.
Jens Weidmann points to unfinished business
We can bring the story up to date with the help of Jens Weidmann, president of the Bundesbank. He pointed out last year that Jacques Rueff’s vision took shape with the launch of the euro, but it was an unbalanced compromise:
“But the integration brought about by economic and monetary union was by construction an asymmetric one. Monetary policy was united. But fiscal and structural policies remained matters of national responsibility, albeit subject to coordination rules that sought to address the deficit bias inherent in this institutional setting.”
Either we must shift economic policies to the European level to make monetary union viable, or change the existing framework.
Weidmann concluded that giving up national sovereignty in fiscal and economic matters was not on politically. The only way forward was to change the framework: break the close links between banks and sovereigns, make sure government bonds are adequately risk-weighted; and set limits for banks’ exposures to sovereigns, as is already the case for private creditors:
“Getting to grips with the implicit guarantee for sovereigns would be a big step towards eliminating the inherent tensions in the monetary union’s structure. Removing the implicit guarantee for banks would be another one.”
What would be Rueff’s comment, if he were alive today? I think he would say that the changes in the framework which Dr Weidmann wants would, if enacted and sucessfully put into practice, amount to a de facto acceptance of the loss of national autonomy that he says is unacceptable. Either Europe is built on sound monetary principles or it will fail.