Courtesy Reuters

A Monetary System for the Future

In this fortieth anniversary year of the international monetary conference at Bretton Woods, New Hampshire, there have been numerous but vague calls for a new Bretton Woods conference to improve our international monetary system which, if not actually ailing, at least leaves many participants uneasy and discomfited. Much of the discomfort relates to the large and burdensome external debt that has accumulated around the world, but much also goes beyond debt to the underlying monetary arrangements among countries.

Are international monetary arrangements stable? Are they likely to survive over a considerable period of time, such as a couple of decades? My answer is negative. Dissatisfaction with the very short-run and year-to-year movements in real exchange rates, combined with technological developments which will lead to further integration of the world economy, will sooner or later force a change of existing arrangements. Unless that alteration is carefully managed, it will take the form of defensive, insulating measures involving restrictions on international transactions, both trade and finance. That would be politically divisive and economically costly.

A new Bretton Woods conference is wholly premature. But it is not premature to begin thinking about how we would like international monetary arrangements to evolve in the remainder of this century. With this in mind, I suggest a radical alternative scheme for the next century: the creation of a common currency for all of the industrial democracies, with a common monetary policy and a joint Bank of Issue to determine that monetary policy. Individual countries would be free to determine their fiscal policy actions, but those would be constrained by the need to borrow in the international capital market. Free trade is a natural but not entirely necessary complement to these macroeconomic arrangements.

This suggestion, outlined in the following pages, is far too radical for the near future. It could, however, provide a "vision" or goal that can guide interim steps in improving international monetary arrangements, and by which we can judge the evolution of national economic policy.

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