Int’l Monetary Crisis - II

Attempts to Return to Fixed Rates



$ BusinessWeek articles on dollar crisis

$ “New Eurocurrency Era”

$ “More than a supersnake”

$ R.A.Mundell, “Gold Would Serve”

$ Wall Street Journal articles on Baker’s Plan for use of gold in price index


EMS: Reasons

$ Extreme instability of exchange rate markets undercut stable trade & investment

from Common Market to EU to ecu

Europe aiming at monetary union in 1993

monetary union Þ political union

$ EMS helps impose discipline w/in co’s

Triffin:”main purpose of the agreement is to promote domestic policies combating inflation”

EMS would put pressure on co’s w/less control of labor


How the EMS works

$ EMS is extension of the “snake” that linked exchange rates w/in bands

$ Bands = ± 2.25%

fluctuations within ok

fluctuations that exceed this would call for govt intervention, either

$ directly inforeign exchange markets

$ or, indirectly thru Keynesian methods

$ Central Bank collaboration Þ large pool


EMS: Results

$ For 1979-90, inflation WAS reduced (but this included Reagan’s depression

$ Differentials btwn Europeans countries dropped as well

$ But: ‘79 - ’87 $ 11 realignments of rates due to continuing internal problems

$ EMS did NOT provide enough clout to end internal problems

$ Crises like that in 1992 when UK withdrew & bands were widened to 15%


Gold Bugs & Back Doors

$ Search for alternative to dirty floats & fixed rates brought revival of gold bugs

$ Robert Mundell revives French arguments from ‘60s for revaluing gold + coin + surveillance + supply side attacks on labor

$ Treas.Sec.Baker tried sneaking gold in back door thru “commodity price index”

$ Index would be used to inform OECD politics & their coordination


Objections to Gold

$ Commodity prices much more volatile than all prices, thus bad predictor

$ Economists want policy free of any commodity, commodities ¯ role in prices

$ Some say unemployment, not inflation, is the problem, but this has been minority view

$ Upshot: Gold has remained marginalized