Editorial
October 8, 2011
The German Bundestag voted last week to expand the European fund established last year to bail out Greece—or, rather, Greece's creditors. In doing so, it also moved the euro zone one step further away from the bloc's founding principle that its members would share a currency, but be responsible for their own fiscal policies within that currency zone.
In the current global environment of floating exchange rates, this idea seemed radical, and many people thought the experiment was doomed to failure. Yet historically speaking, the real novelty is our system of fiat currencies and floating exchange rates. The modern monetary era began 40 years ago, when U.S. President Richard Nixon closed the gold window. That act led to the collapse of the postwar Bretton Woods system, of which the U.S. dollar, convertible to gold at $35 an ounce, was the anchor.
The end of Bretton Woods led to floating exchange rates and a decade of inflation. For the first time in history, the entire global economy rested on paper currencies with no formal link to precious metals or, for the most part, to each other.
It's true that countries had gone off the gold standard before: sometimes frequently, and most often because of war, which would drive spending beyond a nation's ability to pay its bills in a hard currency. But these moves had always been temporary. What happened after 1971 was different, and it's hard to argue that the results have been stellar. The past 40 years have seen inflation, government spending and government debt all rise significantly in much of the West.
The euro, in this context, was less a leap into the unknown than an attempt to return to an older discipline, one in which governments would not rely on plenipotentiary central banks to bail them out of their policy errors. Europe was attempting a return to a hard currency in which states were expected to pay their way, or pay the consequences.
More
No comments:
Post a Comment