One of the conventional justifications by tenured economists for a fiat currency regime, especially as a replacement for a gold, or other hard currency, standard, is that the financial system has been far more stable under a non-gold standard regime.
While we have frequently shown that this assessment is flawed, the interpretation of the data is always a matter of opinion, and usually breaks down based on ideological conviction: be it Keynesian or Austrian. However, one person whose view carries significant weight among the Keynesian school of thought is none other than former Fed chairman Paul Volcker. Which is why we found it surprising that it was Volcker himself who, on May 21 at the annual meeting of the Bretton Woods Committee, said that “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.” We can, indeed, agree.
However, we certainly disagree with Volcker’s proposal for a solution to this far more brittle monetary system:Â a new Bretton Woods.
Because if there is one place where our view radically diverges with that of the Chairman emeritus of the Group of 30 and not to mention former Fed chairman, it is in the arena of institutional oversight of finance and economics: whereas he and his ilk want more deference to an “official, rules-based managed monetary system”, we believe that this merely sows the seeds of yet another system’s own destruction as it hindres efficient markets, fair price discovery and by definition results in a manipulated market whose purpose is to serve a given policy objective du jour, and in doing so pushes it ever further from an equilibrium point and raises the likelihood of even greater, and more violent crashes.
However, since it is the fate of the current centrally-planned regime to become even morecentralized following its next inevitable crash, we can only sit back and muse at Volcker’s tongue-in-cheek prediction of what will almost certainly come next.
His full speech is presented below:
REMARKS BY PAUL A. VOLCKER AT THE ANNUAL MEETING OF THE BRETTON WOODS COMMITTEE WASHINGTON, DC – MAY 21, 2014 (pdf)
A NEW BRETTON WOODS???
Weeks ago, Dick Debs overcame my reluctance to participate in still another public meeting. And once that commitment was made, the inevitable question followed: â€Paul, we need a title for your remarksâ€.
Well, what could I say that could be new or provocative amid all the conversations about the markets, financial reforms in all their variety, or even the Volcker Rule itself?
Well, given the sponsorship of this meeting, what popped out of my mouth was, “What About a New Bretton Woods???†– with three question marks.
The two words, “Bretton Woodsâ€, 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 1950’s and 60’s to sustained growth and stability.
Even then there were recurrent stresses and strains, but the sense of a strong commitment to the new system prevailed: the potential resources of the IMF were enlarged, a network of swap agreements was created, and there was even some Treasury borrowing in foreign currencies! Today’s “quantitative easing†had a smaller-scale precedent in the early 1960’s. “Operation Twistâ€, was designed to keep long-term interest rates low as short-term rates were raised, at least in part to protect the dollar. Even more striking was the introduction of a variety of controls by the United States on the export of capital.
