Re: Quo Vadis 2003?

["Gunnar Tomasson" <gunnar.tomasson@xxxxxxxxxxx>]

Re. the following:

It's clear that the Bretton Woods monetary system was house of
cards.  The present system is a mix of BW institutions and free
floating exchange rates.  So referring to the post-BW system
leaves a lot to the imagination.  Just what is it?  And more
importantly, if you can describe a (politically) viable system
that will do better, what is it?

Comment:

1.  As noted, inter alia, by former IMF Deputy Managing Director in an
article on the occasion of the IMF's fiftieth anniversary, the IMF has been
without ANY jurisdictional role with respect to world monetary arrangements
since the mid-1970s.

2.  Post-Bretton Woods world monetary arrangements is shorthand for (a) use
of the U.S. dollar as World Currency, and (b) absence of ANY effective
official regulatory structure for the operations of non-government financial
institutions.

3.  The original (Friedman) case for "free floating exchange rates"
envisaged neither large-scale external deficit financing by the BW
institutions nor exercise of external political leverage over the exchange
rate policies of individual countries as under the present "dirty float"
system.

4.  I have long believed that the "(politically) viable system" of the past
three decades is NOT economically viable - but, to paraphrase Keynes, I do
not agree that political leaders lack the smarts to (a) understand the
difference between the two forms of viability, (b) recognize, and (c) act on
their duty to put in place monetary arrangements that provide sustainable
support for world employment and output.

5.  A good point of departure for work thereon - albeit in need of update in
light of changed circumstances - was outlined by Keynes in a memorandum in
the early 1940s as follows:

"We need an instrument of international currency having general
acceptability between nations...

"We need an orderly and agreed method of determining the relative exchange
values of national currency units, so that unilateral action and competitive
exchange depreciations are prevented.

"We need a quantum of international currency, which is neither determined in
an unpredictable and irrelevant manner as, for example, by the technical
progress of the gold industry, nor subject to large variations depending on
gold reserve policies of individual countries;  but is governed by the
actual current requirements of world commerce, and is also capable of
deliberate expansion and contraction to offset deflationary and inflationary
tendencies in effective world demand.

"We need a system possessed of an internal stabilizing mechanism, by which
pressure is exercised on any country whose balance of payments with the rest
of the world is departing from equilibrium in either direction [Are you
there, Greenspan? - insert], so as to prevent movements which must create
for its neighbours an equal but opposite want of balance.

"We need an agreed plan for starting off every country after the war [The
coming - functional - collapse of post-Bretton Woods world monetary
arrangements - insert] with a stock of reserves appropriate to its
importance in world commerce, so that without undue anxiety it can set its
house in order during the transitional period to full peacetime
[Post-post-Bretton Woods - insert] conditions.

"We need a central institution, of a purely technical and non-political
character [The IMF as World Central Bank - insert] to aid and support other
international institutions concerned with the planning and regulation of the
world's economic life.

"More generally, we need a means of reassurance to a troubled world
[Including erstwhile newly traumatized U.S. Baby Boomers - insert], by which
any country whose own affairs are conducted with due prudence is relieved of
anxiety for causes which are not of its own making, concerning its ability
to meet its international liabilities; and which will, therefore, make
unnecessary those methods of restriction and discrimination [A.k.a. IMF
"stabilization programs" - insert], which countries have adopted hitherto,
not on their merits, but as measures of self-protection from disruptive
outside forces."

6.  "The document was at once subjected to close scrutiny in the Treasury,"
Roy Harrod wrote, "and it went through many drafts.  The obvious criticism
was that it was too grandiose; it was thought to be almost Utopian.  Keynes
bided his time in regard to this view.  He must first get the scheme into
good order."

7.  There is work to be done.

Gunnar







----- Original Message -----
From: "William F Hummel" <wfhummel@xxxxxxxxx>
To: "Gunnar Tomasson" <gunnar.tomasson@xxxxxxxxxxx>; <pkt@xxxxxxxxxxxxxxxx>
Sent: Monday, December 30, 2002 6:16 PM
Subject: Re: Quo Vadis 2003?