Currency Areas, Exchange Rate Systems, and
International Monetary Reform
Charles Rist, French economist and central banker, once said that “democracy killed the gold standard.” A nice phrase—he was a very good economist. What Ithink he meant was that democracy results in an increase in social demands and redistribution programs that governments have to supply or else be ejected at the next election. In the effort to finance the new programs governments raise taxes to the limit and then engage in borrowing and deficit financing from the central bank, leading to a breakdown of convertibility and the collapse of the gold standard. The gold standard will no longer act as the “golden brake.” Rist's idea was very prophetic, but I think it does not provide the right clue as to what destroyed the gold standard. We have to look elsewhere.
Strong currencies are the children of empires and great powers. The dollar became the greatest currency of the twentieth century because it was comparatively stable and America became the superpower. As the United States came to dominate the international monetary system, the dollar elbowed out gold as the principal asset of the system. When General de Gaulle in the 1960s wanted to attack the United States and its “dollar imperialism, ” he served up a demand for a return to the gold standard, the only conceivable rival to a dollar-based system. The United States, of course, wouldn't hear of it, and, after it was taken off gold in 1971, the dollar, instead of sinking into oblivion, had no rivals. What killed the gold standard was the financial supremacy of the United States and its delivery system, the dollar.
Currency power configurations, however, are never static. They evolve along predictable lines with the growth and decline of nations. Looking at the international monetary system as a constantly evolving oligopoly, it seems inevitable that a countervailing power would develop to challenge the dollar. Now, at the close of the “American century, ” the euro has appeared as a potential rival, the countervailing power, to the dollar.
The euro may turn out to be more of an important change in the international monetary system than the breakdown of the Bretton Woods arrangements in 1971. If it fulfils its promise as an alternative to the dollar, the euro can change the power configuration of the system. The breakdown of Bretton Woods changed its veneer but not its fundamentals. Before and after the collapse, the dollar remained unchallenged as the de facto monarch,
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Publication information: Book title: The Dollarization Debate. Contributors: Dominick Salvatore - Editor, James W. Dean - Editor, Thomas D. Willett - Editor. Publisher: Oxford University Press. Place of publication: New York. Publication year: 2003. Page number: 17.
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