Newspaper article The Christian Science Monitor

Political Games and Currency Fuss

Newspaper article The Christian Science Monitor

Political Games and Currency Fuss

Article excerpt

EDWARD BERNSTEIN, a famed expert in international monetary affairs, doesn't mince his words on President Bush's suggestion to European central bankers and finance ministers last Sunday that a basket of commodities, including gold, be used as one of several indicators for setting relative currency values.

"It is real nonsense," says Dr. Bernstein, now with the Brookings Institution in Washington.

Stanley Fischer, a former chief economist for the World Bank, was no less critical. "That is just a decoy or diversion," says the Massachusetts Institute of Technology economist. "I don't know what it has to do with anything."

In Washington, the suspicion is that the proposal has more to do with Republican politics than reality. As Mr. Bush moves toward the center at election time, throwing a bone to the right wing of the party can be politically useful. Certainly the proposal pleased the supply-side writers on the editorial page of the Wall Street Journal. A gold and commodities standard for currency is also advocated by Lawrence Kudlow, chief economist at the Office of Management and Budget during some of the Reagan years and now chief economist with Bear Stearns & Co., a brokerage house.

"The G-7 {Group of Seven major industrial democracies} must quickly meet to adopt a true growth strategy, including a coordinated commodity price rule, which will lead to sharply lower interest rates," writes Mr. Kudlow.

President Bush was cautious in his suggestion, saying that in order to strengthen the coordination of economic policies between the G-7, the US will advocate that "we explore the development of an independent reference point" - the commodity basket.

But Bernstein, a member of the US delegation at the 1944 Bretton Woods conference that established the postwar international monetary system, says a commodity-based standard has been proposed at least 12 times since then and gone nowhere. Commodity prices, he says, are too volatile to be suitable as a reference point. The goal of monetary policy should be stable prices for domestically produced finished goods, he says.

Fischer says there is "no good reason" why a commodity standard is better than a central bank pursuing a price level target through its monetary policy. …

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