III. From National to International Regulation of Money: The Need for Coordination

The problem discussed above also appears at the international level: there is an obvious need for international coordination of some kind in today’s globalized economy. But this is not specific to our age. International coordination of monetary systems and policies has a long history, ranging from loose forms of informal cooperation to fixed exchange rate arrangements and even attempts at full monetary union between independent, sovereign states.

A. Alternative structures of international coordination

Competition between independent central banks: the flexible exchange rate system

One of the prototypes among different systems of international money is a flexible exchange rate arrangement with fully autonomous national (or regional) central banks, each issuing its specific (‘original’) money and determining the relative value of this money via its policy of issue (i.e. the resulting relative scarcity of its product and the rate of inflation implied by it). In the 1950s and 1960s, in view of the increasing difficulties of the fixed exchange rate system of Bretton Woods in force at that time, a broad array of academic economists made the case for such a system, arguing that it would lead to smooth and automatic adjustment of international financial imbalances and thus represents an ideal instrument for international coordination (e.g. Friedman,[1] Sohmen[2] and Lutz[3] to name but a few). The system of flexible exchange rates adopted after the breakdown of the old arrangement in 1973 has prevailed ever since. It has, however, never worked as smoothly and elegantly as promised by academic blueprints. Almost from the beginning, it was characterized by numerous episodes of excessive exchange rate fluctuation and foreign exchange market turbulence. Nevertheless, the system has great advantages. The major advantages are that (i) it leaves monetary policy as an independent tool of macroeconomic policy and adjustment to the national (or regional) central banks and their governments, and (ii) it preserves an element of competition (and thus checks to potential abuse) in the world money system. Still, annoyance with exchange rate disturbances and the degree of exchange rate uncertainty associated with it has led to a search for additional instruments of coordination, in particular, currency boards, aimed at dampening exchange rate volatility and the planning uncertainty resulting from it.[4] Obviously, what is required is a more or less explicit harmonization and coordination of the goals and procedures of the various central banks involved.

  • [1] Milton Friedman, ‘The Case for Flexible Exchange Rates’ in Friedman, above n 3, at 157—203.
  • [2] Egon Sohmen, Flexible Exchange Rates (Chicago: University of Chicago Press, 1961).
  • [3] Friedrich A. Lutz, ‘The Case for Flexible Exchange Rates’, VII Banca Nazionale del LavoroQuarterly Review 175 (1954).
  • [4] See Lastra, above n 1, at 73—9.
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