Barry Eichengreen is an American economist at Berkeley with experience at the IMF. He is a recognized expert on the Great Depression which he argues was due to the gold standard and the contractionary monetary policy that it caused. He has a new article in Foreign Affairs which seeks to answer the question “Will we replay the 1930s or the 1970s?”
The international monetary system rests on just two currencies: the dollar and the euro. Together, they account for nearly 90 percent of the foreign exchange reserves held by central banks and governments. They make up nearly 80 percent of the value of Special Drawing Rights, the reserve asset used in transactions between the International Monetary Fund (IMF) and its members. Of all debt securities denominated in a foreign currency, more than three-quarters are in dollars and euros. The two currencies together account for nearly two-thirds of all trading in foreign exchange markets worldwide. They are the essential lubricants of global trade and finance. Were they not widely accepted, the global economy could not sustain current levels of international trade and investment.
That is why the problems now faced by both currencies are so alarming. Today, more than at any time in recent memory, analysts and investors are voicing doubts about the stability of the dollar and the euro and the international monetary system that depends on them. ….
Such systems have collapsed before: first in the 1930s and again in the 1970s. The 1930s collapse played a significant role in spurring a worldwide depression that crippled economic activity and fed political extremism. In contrast, the systemic failure of the 1970s, although potentially just as dangerous, had far less catastrophic effects; the global economy was wounded, but not mortally. It is crucial to understand these two historical precedents in order to gauge what might happen today if there were full-blown crises of confidence in both the dollar and the euro.
Eichengreen summarizes the issues facing policymakers on both sides of the Atlantic, providing a gloomy outlook on the political will necessary to avoid a repeat of the 1930s. One of the key prescriptions: the era of kicking the can down the road will have to stop; restructurings and austerity will be necessary, and the sooner the better. He also discusses the IMF’s SDRs and the the Chinese RMB as reserve currencies.
Read the full article here.
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