International Money: Big-Government Solution or Trust and Honesty?

Robert Zoellick is back in the news with advice about international monetary policy. His Financial Times commentary starts out with the admission that "[n]ew agreements may be in short supply when finance ministers of the Group of 20 heading economies meet this weekend in Paris."

Paradoxically, he ends up his commentary recommending that the G7 should "issue a statement to reflect" ... the "agreement" "establishing an important norm: to maintain flexible exchange rates, without intervention, unless the group agrees special circumstances warrant action." I guess he thinks agreement is more easily reached among seven than among twenty.

As to be expected from someone who is the acting President of the World Bank Group, he recommends that an international agency, specifically the IMF, should act as a "referee, able to blow the whistle on the appropriateness of external policies" of nations, with the IMF having no power to "impose penalties." Right. That should work, just like it has in the past ... Oh, that's right, it hasn't.

But that doesn't prevent Zoellick from advising us to expand the IMF's responsibilities even more. They should also "sharpen the multilateral review" of certain policies, which review should "compare national policies with international information indicators, including commodity prices such as gold." At least he got that right.

He goes on to list a few more ideas of how a world agency such as the IMF and the WTO could, by working together, offer incentives or disincentives to world governments. I suppose two international agencies is better than one. I say, Good luck.

Much more reasonable, and much more in line with human nature, would be something more resembling what historically had worked pretty well for many decades in the free markets of 19th and 20th century Western civilization. Take, for example, the ideas offered up by Rep. Ron Paul and Lewis Lehrman in their book The Case for Gold. This book was written after the 1982 Gold Commission, which, according to some who were present, was something akin to a sham. (I'm referring to comments made by Anna J. Schwartz in 2004, set forth in the AIER book entitled Prospects for a Resumption of the Gold Standard referenced at the end of this post.)


[Thanks to Google, Creative Commons, for the image.]

The Case for Gold is now being re-released by Mark Calabria, Director of Financial Regulation Studies at Cato Institute. Download it for free here.

Here are a few poignant quotes from Calabria's description of the book:

"Its authors argued that while persistent and high inflation, a weak economy, and high unemployment were the direct result of misguided Keynesian policies, the answer was not monetarism. For the basis of monetarism is still allowing a government monopoly on the issue of money. We have again found ourselves in an environment where both Keynesian and monetarist policies have failed us. The necessity for alternate options is pressing."

"Paul and Lehrman remind us that when government has the ability to abuse our trust, as in the case of purchasing its own debt or debasing its currency, it will inevitably betray that trust.... The Case for Gold is the case for limited government, a case for applying the rule of law to our monetary arrangements, as opposed to the highly discretionary rule of man which now governs our monetary system. With the public's renewed interest in constitutional government, it is only fitting that such an interest extends to money."

"Paul and Lehrman remind us that the ultimate purpose of a monetary standard is not price stability, but 'trust and honesty.'"

The American Institute for Economic Research held a symposium in May of 2004 on the very subject of resumption of something resembling the gold standard. The results are set forth in one of their booklets, available here. Contributing to the conference were Lawrence H. White, Anna J. Schwartz, Gerald P. O'Driscoll, Jr., H. David Willey, Hugo Salinas Price, John C. Hathaway, Michael T. Darda, Richard Sylla, Michael W. Crook, Robert E. Wright, and John H. Wood.

Both works are an excellent read.

Anna Schwartz, Still Feisty

I noted the bowed gray head across the library at the American Institute for Economic Research. She was to give a talk to visiting students and fellows on the evolving role of the Federal Reserve.


[Thanks to NBER.org for the image.]

Siding up to her chair, I put a soft hand on her shoulder and she lifted her attention from the Financial Times. I had to repeat my introduction--her hearing isn't what it once was. But as soon as she got the words, a bright smile lit up her face.

I didn't want to tire her before her upcoming effort, so I left her to her collected thoughts. She seemed too tiny to stand up to the demands of improvised talking and questioning, and someone warned me that she would probably simply read a recent paper. So I prepared myself to be a little uncomfortable listening to something I had already read.

Twenty minutes later, I was listening to the booming clear thunder of her voice as she laid on thick her criticism of the Fed's lack of moral backbone (my words--she is much more diplomatic).

Walker Todd, co-writer with Dr. Schwartz of an upcoming article about the legal and economic significance of the Fed's recent actions, would ask a leading question of her, and this uncanny out-of-body voice just took over.

This woman's mind is still as sharp as it ever was. She updates her stats and info daily and--better yet--retains them, analyzes them, and puts them to good use. She is 93 years old.

Even at this advanced age, she'd make a great Fed chairman.

She got her Masters in economics at Columbia, age 19. What a phenomenon.

See this article for her position.

As soon as her new co-authored paper is available, I'll link to it.

Anna Schwartz Joins the Fed Bashers

No sooner had I pushed the "publish" button on my previous post, that the illustrious Anna Schwartz joins the Fed-bashing fray, according to this article at the London Telegraph, quoted by Ambrose Evans-Pritchard.


[Thanks to nber.org for the photo.]

Anna Schwartz, still fully active and coherent at 92, is one of my favorite economists and a co-author with Milton Friedman of a classic text called "A Monetary History of the United States." She issues what EP calls a "scathing indictment," of Fed policy under Greenspan. She says:

"They [the Fed governors] need to speak frankly to the market and acknowledge how bad the problems are, and acknowledge their own failures in letting this happen. This is what is needed to restore confidence.... There never would have been a sub-prime mortgage crisis if the Fed had been alert. This is something Alan Greenspan must answer for.... It is clear that monetary policy was too accommodative [in 2003 and 2004]. Rates of 1 per cent were bound to encourage all kinds of risky behaviour.... This attempt [by Greenspan] to exculpate himself [by blaming an Asian savings glut] is not convincing. The Fed failed to confront something that was evident. It can't be blamed on global events.... Liquidity doesn't do anything in this situation. It cannot deal with the underlying fear that lots of firms are going bankrupt...."

Goldman Sachs wants the Fed to loosen rates to combat the problem, but as one of the commentators after the article notes: "[Goldman Sachs economist Jan Hatzius] is proposing reducing interest rates further? What about inflation? It is getting scary when oil hits $100 a barrel and we are lowering interest rates. I want to be paid in gold next year!" (Posted by James)

Note that Anna Schwartz is not credited with having recommended Fed loosening, but rather with stating that "liquidity doesn't do anything in this situation." She also states that our present quandary is nothing like 1929. "This is nothing like the Depression. I don't really believe the economy as a whole is going to fall apart. Northern Rock has been the only episode of a bank failure so far." (Well, she doesn't mention the big Wall Street firms' poor balance sheets; mortgage company bankruptcies; German, French and Spanish banks' troubles; Countrywide's near-miss; WaMu's coming buy-out; and NetBank's demise, this last probably only a coincidental incident.)

We are in a very sticky situation. It is true that stifling credit right at this moment would be devastating, but I would agree with Professor Schwartz that gobs of credit will not necessarily cure the disease. We may just have to plug through this.

The Fed is experimenting with ways to handle the blips as they occur. They will certainly lower rates on or before January 30. Meantime, they are lending billions of credit through another "banking" window, purportedly on a temporary basis, to sidestep inter-bank stoppages that risk throwing the economy into unnecessary turmoil.

Foreign money is also cooperating, furnishing needed capital to shore up our big Wall Street firms. I much prefer that to seeing them declare bankruptcy and using up the little FDIC cash we have on hand. As I said earlier, this foreign investment is the ignominious savings glut the Fed was trying to implicate in our previous credit problems. It will surely come in handy now, won't it?