Robert Mundell (2011) - Currency Wars, Euro-Mania and the Price of Gold

Robert Mundell (2011)

Currency Wars, Euro-Mania and the Price of Gold

Robert Mundell (2011)

Currency Wars, Euro-Mania and the Price of Gold

Abstract

This paper reviews the evolution of international monetary phenomenon over the past century and makes the case for restoring an international monetary system anchored to a stable global currency. It argues that since the Bretton Woods System broke down in 1971, the international economy has experienced crises of a frequency and severity not seen in centuries. The oil crises of the 1970s, the savings and loan and international debt crises of the 1980s, the Asian Crisis of the 1990s, and the crisis fiascos of 2007-9 were all strongly affected if not caused by huge swings of major currencies.
The sub-prime mortgage crisis of 2007 was transformed into the great panic of the third quarter of 2008 by tight money, reflected in the soaring dollar, collapsing price of oil, steep fall in the gold price and the dramatic collapse of the change in the U.S. consumer price index from 5.5% in June 2008 to 0% in December to negative in the first half of 2009. The soaring dollar aggravated the downturn in the housing market and chased foreign suitors of the failing banks away. When Lehman went bankrupt, confidence was shattered, credit markets dried up and trillions of dollars of bailout money did not restore equilibrium.
The Sarkozy Proposals for reform of the international monetary system have addressed three problems: the instability of raw material prices, the instability of major exchange rates and the need for improved governance of the system. This critique is correct in my view and could be addressed if the dollar-euro rate were stabilized within limits with monetary coordination between the Fed and the ECB. The stabilization could be achieved with each country supporting the other countries currency at its lower bound. China could join the group to make it a triad, the DEY, which could be designated for a renewable period of ten years as the anchor for a global currency in which all IMF members are included.

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