Why a monetary standard is needed
Lord Rees-Mogg, former editor of The Times, London and doyen of British commentators, has called for a reform of the global financial system (GFS). Rees-Mogg quotes Paul Volcker, who in a recent interview described the present period as one of the most difficult in history:
“This is a recession on top of a complete financial breakdown and it will take a very, very long time to recover.”
Meanwhile, the IMF’s Christine Lagarde has admitted that the financial system is no safer today than it was five years ago (see RP’s Diary 25/09/12).
What to do? Rees-Mogg rightly points out that a second Bretton Woods would not succeed in constructing a new GFS “until the recession blows itself out or is finally stabilised”. However, when governments do get round to discussing it, a monetary standard will be needed:
“In any reform of the global system, some measure will have to be used to replace the stabilisation that was provided by the Gold Standard”.
No currency is strong enough to fulfil the role that gold, and later the dollar, played until 1971. as Judy Shelton has recently emphasised without a common yardstick, international currencies have become dangerously unstable.
“We cannot ignore the damaging impact of chaotic exchange rates among leading currencies if we are to identify what brought on the financial meltdown that has since devastated real economies around the world.”
Both Shelton and Rees-Mogg favour a gold anchor. In some moods, so does Robert Mundell.
But there are other options. In The Money Trap, I review the history of the debate on monetary standards. I conclude that almost any one of them would be an improvement on current anarchy.
It’s time to introduce the Ikon. A modern version of Keynes’s bancor.
The Ikon ties money to real assets. Operationally, it would be similar to a gold-based or commodity standard. It would offer convertibility to a real asset. Once established, it would provide incentives to governments to behave themselves better. But instead of a commodity or bundles of commodities it would use the new technology offered by globalisation of world stock exchanges and equity markets to tie money to tradable claims on productive assets. In one alternative of the scheme, the IMF would redefine the SDR as a fraction of the market portfolio of tradable assets – a proxy of which is a globally diversified basket of equities. It would be a voluntary, self-regulating standard. It would not require a global government or world central bank.
Such a standard would reduce credit and business cycles, join humanity in a monetary thread, and allow business to plan long-term investment with confidence. Prices would gradually fall in line with productivity. As money tracks real assets, so the market rate of interest could not get out of line with the prospective yield on investments. (for more details, see The Money Trap, Part IV). The Ikon would stabilise Tobin’s Q, the replacement cost of capital.
The current “liquidity trap” where central banks boost their balance sheets by trillions of dollars to inflate asset prices and get businesses investing again would be seen for what it is – a symptom of a failed monetary system.
We are witnessing the degradation of paper money. Yet despite these frantic attempts, the euro area, the UK and US again face recession. That is the trap! The answer is to re-connect money and banking to the world of jobs.
The countries with the biggest incentive to create and adhere to such a standard are those approaching the edge of the hyper-inflation cliff.
The IMF is right to view this as an international crisis requiring an international solution.
The Ikon points the way forward. Maynard would have been amused. What about you, Paul, William, Christine?