Benjamin J Cohen University of California Santa Barbara Remarks prepared for the Conference on The Political Economy of International Money Federal Reserve Bank of Dallas 4 April 2014 ID: 742999
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CURRENCY WARS: YESTERDAY, TODAY – AND TOMORROW?
Benjamin J. Cohen
University of California, Santa Barbara
Remarks prepared for the Conference on “
The Political
Economy of International Money”
Federal Reserve Bank of Dallas, 4 April 2014Slide2
THE POLITICS OF EXCHANGE RATES
What are the lessons from the Great Depression about the management of currency values?
Conventional wisdom at the time: “the proved disadvantages of freely fluctuating exchanges” (
International Currency Experience
, 1944). Exchange rates would have to be managed, subject to rulesSlide3
TWO QUESTIONS
1. Was the conventional wisdom right? (That is, was the correct lesson drawn?)
Answer: a qualified Yes
2. Has successfully has the lesson been implemented? (That is have exchange rates been managed well?)
Answer: not very well, in part because another important lesson was forgotten Slide4
1. WAS THE CONVENTIONAL WISDOM RIGHT?
There is no doubt that “freely fluctuating exchanges” invited competitive depreciations – in effect, currency war
From 1930 to 1938, 20 countries devalued by more than 10 %, some several times
Some evidence that depreciations may have been to some extent beneficial, by allowing less restrictive monetary policy (
Eichengreen
and Sachs, 1985)
But also no doubt that they were disorderly and disruptive
Legitimate conclusion: need some kind of rules to prevent currency warsSlide5
2. HOW SUCCESSFULLY HAS THE LESSON BEEM IMPLEMENTED?
Short answer: not very well. Hence much talk of currency wars today
Longer answer: a series of attempts to implement effective rules, but with little success. Most notable:
Bretton Woods (1944)
Committee of Twenty (1972-74)
Second Amendment (1976)Slide6
BRETTON WOODS
Floating was to be discouraged; but there was also a fear of too much rigidity
Hence a compromise: the par value system, meant to provide stability but also allow for adjustments in specific circumstances (“fundamental disequilibrium”)
Ultimately proved unworkable (What is a “fundamental disequilibrium?”)Slide7
COMMITTEE OF TWENTY
Called for a new “exchange rate regime based on stable but adjustable par values”
Proved unacceptable – overtaken by eventsSlide8
SECOND AMENDMENT
New Article IV
Free choice of exchange rate policies, subject only to:
a
dmonition to “avoid manipulating exchange rates… to gain an unfair competitive advantage”
“firm surveillance” by the IMF
These are the prevailing rules todaySlide9
HOW WELL HAVE THE RULES WORKED?
The IMF has tried hard
As early as 1977, the Fund specified principles for the exercise of surveillance
Article IV consultations were instituted
Principles for surveillance were updated in 2007
But governments have resisted oversight; dirty floats have become increasingly prevalent; talk of currency wars is not exaggeratedSlide10
WHY HAVE THE RULES NOT WORKED?
General issue: state sovereignty (resistance to supranational authority)
More specific issue: Geopolitics
A forgotten lesson of the Great Depression: the Tripartite Agreement of 1936 highlighted the importance of consensus among the major powers of the day; acknowledgement of mutual responsibility for systemic management.
Is a modern version of the Tripartite Agreement possible today?
UnlikelySlide11
CONCLUSION
Lessons have been learned, but selectively and imperfectly
.
George Santayana said: “Those who cannot remember the past are condemned to repeat it.”
Are we condemned to repeat the currency wars of the 1930s?
Not impossible…