Seth Lipsky the editor of the storied New York Sun (a brand distinguished by the long residency of Henry Hazlitt) recently in the Wall Street Journal brought to wider attention certain remarkable recent comments by Paul Volcker. Volcker spoke before the May 21st annual meeting of the Bretton Woods Committee at the World Bank Headquarters in Washington DC. Volckers remarks did not present a departure in substance from his long-standing pro-rule position. They nonetheless were striking newly emphatic both by tone and context.
What About a New Bretton Woods???" with three question marks. The two words Bretton Woods" still seem to invoke a certain nostalgia memories of a more orderly rule-based world of financial stability and close cooperation among nations. Following the two disasters of the Great Depression and World War II that at least was the hope for the new International Monetary Fund and the related World Bank the GATT and the OECD. No one here was actually present at Bretton Woods but that was the world that I entered as a junior official in the U.S. Treasury more than 50 years ago. Intellectually and operationally the Bretton Woods ideals absolutely dominated Treasury thinking and policies. The recovery of trade the opening of financial markets and the lifting of controls on current accounts led in the 1950s and 60s to sustained growth and stability.
Efforts to reconstruct the Bretton Woods system either partially at the Smithsonian or more completely in the subsequent negotiations of the Committee of 20 ultimately failed. The practical consequence and to many the ideological victory was a regime of floating exchange rates. Somehow the intellectual and convenient political argument went differences among national financial and economic policies shifts in competitiveness and in inflation rates all could be and would be smoothly accommodated by orderly movements in exchange rates.
Volcker fully recognizes the difficulties in restoring a rule-based well functioning system both in his speech and in this private comment to Lipsky made thereafter. Lipsky: Its easy to say whats wrong" Mr. Volcker told me over the weekend but sensible reforms are a pretty tough thing." The devil of course is in the details. What rule should prevail? There is an almost superstitious truculence on the part of world monetary elites to consider the restoration of the gold standard. And yet the Bank of England published a rigorous and influential study in December 2011 Financial Stability Paper No. 13 Reform of the International Monetary and Financial System. This paper contrasts the empirical track record of the fiduciary dollar standard directed by Secretary Connally and brought into being (and then later administered by) Volcker. It determines that the fiduciary dollar standard has significantly underperformed both the Bretton Woods gold exchange standard and the classical gold standard in every major category.By now I think we can agree that the absence of an official rules-based cooperatively managed monetary system has not been a great success. In fact international financial crises seem at least as frequent and more destructive in impeding economic stability and growth.The United States in particular had in the 1970s an unhappy decade of inflation ending in stagflation. The major Latin American debt crisis followed in the 1980s. There was a serious banking crisis late in that decade followed by a new Mexican crisis and then the really big and damaging Asian crisis. Less than a decade later it was capped by the financial crisis of the 2007-2009 period and the great Recession. Not a pretty picture.
As summarized by Forbes.com contributor Charles Kadlec the Bank of England found:
That said the Bank of England paper resolves by calling for a rules-based system without specifying which rule. Volcker himself presents as oddly reticent about considering the restoration of the golden rule." Yet as recently referenced in this column in his Foreword to Marjorie Deane and Robert Pringles The Central Banks (Hamish Hamilton 1994) he wrote:When compared to the Bretton Woods system in which countries defined their currencies by a fixed rate of exchange to the dollar and the U.S. in turn defined the dollar as 1/35 th of an ounce of gold:
- Economic growth is a full percentage point slower with an average annual increase in real per-capita GDP of only 1.8
- World inflation of 4.8 a year is 1.5 percentage point higher;
- Downturns for the median countries have more than tripled to 13 of the total period;
- The number of banking crises per year has soared to 2.6 per year compared to only one every ten years under Bretton Woods;
It is a sobering fact that the prominence of central banks in this century has coincided with a general tendency towards more inflation not less. By and large if the overriding objective is price stability we did better with the nineteenth-century gold standard and passive central banks with currency boards or even with free banking. The truly unique power of a central bank after all is the power to create money and ultimately the power to create is the power to destroy.
There is an active dispute in Washington between Republicans who predominantly favor a rule-based monetary policy and Democrats who predominantly favor a discretion-based monetary policy. The Republicans have not specified the rule they wish to be implemented. The specifics matter.
There is an abundance of purely empirical evidence for the gold standards effectiveness in creating a climate of equitable prosperity. The monetary elites still flinch at discussion the gold option. That said the slow but sure rehabilitation of the legitimacy of the gold standard as a policy option was put into play by one of their own no less than the then World Bank Group president Robert Zoellick in an FT op-ed The G20 must look beyond Bretton Woods. There he observed in part that Although textbooks may view gold as the old money markets are using gold as an alternative monetary asset today."
There are many eminent and respectable elite proponents of the gold standard. Foremost among these Reagan Gold Commissioners Lewis E. Lehrman (with whose Institute this writer has a professional association) and Ron Paul and Forbes Media CEO Steve Forbes coauthor of a formidable new book Money among them. There are many more too many to list here.
In the penultimate paragraph of his remarks to the Bretton Woods Committee Volcker observes:
Walter Bagehot long ago set out succinctly a lesson from experience: Money will not manage itself". He then spoke from the platform of the Economist to the Bank of England. Today it is our mutual interdependence that requires a degree of cooperation and coordination that too often has been lacking on an international scale.As the great Walter Layton editor of the Economist wrote in 1925 the choice which presents itself is not one between a theoretical standard on the one hand and gold with all its imperfections on the other but between the gold standard … and no control at all." No control at all" anticipates Volckers own critique. If Chairman Volcker overcame his aversion to considering the gold standard as a respectable option for consideration he just might find that his his stated concern We are long ways from (a new Bretton Woods conference)" may be exaggerated. A golden age of equitable prosperity and financial stability is closer than Mr. Volcker believes. The corollary to Volckers dictum ultimately the power to create is the power to destroy" is that the power to destroy is the power to create. It is time and past time Mr. Volcker to give full and respectful consideration to the gold standard which served the world very well indeed and would serve well again.