50 years of pursuit of currency stability
Global Economic Update
Sign up for myFT Daily Digest and be the first to learn about global economic news.
This week is the 50th anniversary of President Richard Nixon’s announcement to the world that Washington will no longer exchange U.S. dollars for gold. The gold peg, fixed at $35 per ounce, was the core of the post-war Bretton Woods fixed exchange rate system design. The “Nixon shock” destroyed this pillar, and the system quickly disintegrated completely, ushering in a chaotic period of exchange rate instability and high inflation.
No one should cry for the gold standard. This “barbaric relic”, as Keynes called it, should be retired long ago. A collective commitment to stability, rather than arbitrary pricing of metals, enables the Bretton Woods system to function. Nixon’s shock was not unprecedented. The 35-dollar peg itself was established by Franklin Roosevelt after breaking the early gold peg and devaluing the U.S. dollar. The nostalgia for gold is misguided and misplaced.
However, this is not the case for the broader ambitions of the Bretton Woods architecture. The global monetary and financial policy after 1971 has been dedicated to restoring the lost stability provided by the system. It took 25 years for the central bank to decide and master the inflation target as a policy strategy to ensure the stability of domestic prices. As the asset bubbles and financial crises since the 1980s have shown, even the ultimate success cannot guarantee broader financial stability-and it is conceivable that today’s record low interest rates and high debt may undermine it.
International stability is even more elusive. Although economists and policy makers have increased their understanding of floating exchange rates with the development of “non-system” after 1971, few people have fully adapted to floating exchange rates. They did not achieve the monetary independence that they once seemed to promise, nor did they protect the real economy from financial shocks; they sometimes amplify them. Today’s greatly increased cross-border capital flows make this all the more true.
Governments of various countries have adopted various strategies to limit exchange rate fluctuations. The biggest leap occurred in the single currency area of ??the European Union. Currency unification is unrealistic for other economies, and the formal linking system of different currencies has repeatedly proved to be unworkable.
However, even the largest economies have found it necessary to control exchange rate fluctuations, from the 1985 Plaza Accord to curb the appreciation of the U.S. dollar, to Washington’s long-term concerns about currency manipulation by others or Beijing’s management of the renminbi.
We may be destined to live a stable life that is not as stable as we hoped. The Bretton Woods system relies on strict control of cross-border capital flows, and this control is neither possible nor should it return: a globally integrated world economy relies on the convenience of liquid financial flows, and in general, it is more important to have them. it is good. However, the search for alternatives to the Bretton Woods system suitable for our time for half a century can still go further.
Coordinate macroeconomic policies more closely It will help reduce the instability caused by the inconsistency of the foreign exchange market’s expectations of prices and deficit dynamics across countries. The most relevant Bretton Woods features today are the least remembered. Domestic credit supervision Help protect local economic growth from cross-border financial pressures. Policymakers are rediscovering this in the form of “macroprudential supervision.”
Fifty years have passed, and the allure of gold still exists, but now it is a false promise that encrypted assets are more stable than central bank currencies. The real lesson of the demise of the Bretton Woods system is the opposite: Gold and its digital equivalents cannot be compared with the wise regulation and trust between nations.