Monetary Sovereignty as Globalization's Achilles' Heel

By Steil, Benn | The Cato Journal, Spring-Summer 2007 | Go to article overview

Monetary Sovereignty as Globalization's Achilles' Heel


Steil, Benn, The Cato Journal


It is remarkable how the world's short recent history of floating exchange rates among flat currencies has affected popular thinking about what is eternally normal and proper in the economic system. Recently, Senators Charles Schumer and Lindsey Graham (2006) wrote matter of factly in the Wall Street Journal that "One of the fundamental tenets of free trade is that currencies should float." Such a "tenet," if it were such, could only have emerged since the 1970s. Of course, exchange rates had fluctuated widely in previous centuries, but it has been only since the 1970s that such fluctuations have been taken as connatural with the international monetary regime. Even John Maynard Keynes, the arch slayer of the last remnants of commodity money, was an adamant supporter of fixed exchange rates. (1)

Before the 1970s, it was generally taken for granted that international transactions would be best served by a system of fixed exchange rates relative to the international standard of value, which was a commodity or a claim on a commodity. Money accepted across borders had generally been gold, or claims on gold, for about 2,500 years. The post-1971 international monetary "system," certainly a misnomer, is comprised of 150-some-odd currencies, primarily national, all circulating in the form of irredeemable IOUs, or IOUs redeemable only in other IOUs. Some trade freely against others, some trade freely but with governments buying and selling so as to maintain a desired price, and some are subject to exchange restrictions by their government issuers. This would appear a recipe for continual global chaos, but it functions with far more stability than one might expect, given the complete absence of agreed rules or an agreed international money. This is because one currency, the U.S. dollar, is widely accepted voluntarily as money for the purposes of international transactions.

Nonetheless, it is a source of tremendous periodic instability, manifesting itself in currency crises afflicting countries whose currencies are not acceptable for international transactions, but which build up currency imbalances in their national balance sheets through their imports of dollar capital. Over the past two decades, devastating currency crises have hit such countries across Latin America and Asia, as well as countries just beyond the borders of western Europe; in particular, Russia and Turkey. This has led to international capital flows becoming far and away the most widely condemned flaw in globalization.

That the destabilizing effects of today's cross-border capital flows should be considered, however, even by economists who should know better, a manifestation of "market imperfection" or "irrationality" is to my mind astounding. The fundamental difference between capital flows under indelibly fixed and non-fixed exchange rates was well known generations ago, decades before the modern era of globalization. Consider this excerpt from a lecture by Friedrich Hayek in 1937:

   Where the possible fluctuations of exchange rates are confined to
   narrow limits above and below a fixed point, as between the two
   gold points, the effect of short-term capital movements will be on
   the whole to reduce the amplitude of the actual fluctuations, since
   every movement away from the fixed point will as a rule create the
   expectation that it will soon be reversed. That is, short-term
   capital movements will on the whole tend to relieve the strain set
   up by the original cause of a temporarily adverse balance of
   payments. If exchanges, however, are variable, the capital
   movements will tend to work in the same direction as the original
   cause and thereby to intensify it [Hayek 1937: 64].

This was because

   Every suspicion that exchange rates were likely to change in the
   near future would create an additional powerful motive for shifting
   funds from the country whose currency was likely to fall or to the
   country whose currency was likely to rise. … 

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Monetary Sovereignty as Globalization's Achilles' Heel
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.