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The Forum > Article Comments > A new international Bretton Woods system? > Comments

A new international Bretton Woods system? : Comments

By Bill Lucarelli, published 10/7/2009

The present international monetary system hinges upon very fragile and perilous foundations.

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“The myth of the free market can no longer be legitimised.”

The myth of the free market is that there was one.

Name any relevant country, where the price and supply of money was not controlled by government policy including a central bank explicitly intended to override the free market. Now admit that there was no free market.

What we had, and have, is a system in which government has wide-ranging powers backed by millions of pages of regulations and armies of hundreds of thousands of official to arbitrarily control virtually any and every transaction in the economy, driven only by the need to bribe blocs of political favourites for votes with money confiscated or sneaked from someone else. And the author wants more of that to fix the problems it caused!

The purpose of all the government-sponsored manipulation of the system of money and banking described in this article, was precisely to preserve the rentier status of the government, to preserve its prerogative to sneak-tax the population with inflation, however destructive and unjust the consequences to everyone else.

In other words, aided and abetted by anti-capitalist academics (sound familiar?), governments set up a complicated anti-free-market system that was bound to fail for the same reason that central planning must fail, and that Mises correctly predicted in 1912 would fail: http://www.mises.org/books/tmc.pdf

Then when it failed, they all say the problem was the (non-existent) free market, and we need even more central planning.

Re-regulation and nationalisation of the financial system means the *re-vivification*, not euthanasia of the rentier. Nationalisation of capital markets mean government control of all production and is in effect the same as socialism. Yet no-one has *ever* refuted the Mises’ 1921 argument proving that economic calculation is impossible under public ownership of the means of production; and that therefore socialism is not only impossible in practice, but in theory too.

It is intellectually dishonest of the author to run this line without having first refuted Mises. Go ahead: try. http://mises.org/econcalc.asp
Posted by Wing Ah Ling, Friday, 10 July 2009 12:30:38 PM
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It is amazing, and disgraceful, that this unreconstructed Marxist balderdash is still being peddled by tax-funded academics – and in economics at that! - when it has been definitively refuted both in theory and practice over and over and over again.

North Korea and Burma have nationalised their financial system – all for social justice and the greater good of course - that’s the kind of result you could expect.

“It should be conceded that despite the desirability and urgency of these reforms, the outcome will be ultimately determined by the configuration of political power and geo-political imperatives.”

It is urgent and desirable to reform the system, but why should the outcome be determined by “the configuration of political power and geo-political imperatives”? Does that sound good to you?

What makes you think replacing the Mega-State National Bamboozling Corporations with a Mega-State International Bamboozling Corporation is going to result any less in siphoning money from poor people and nations, and giving it to rich people and nations, and funding unnecessary fascism and wars?

Why should the outcome not be determined by each person’s being free to choose whether to enter into a given transaction or not?

Nothing the author has said has provided the slightest justification for governmental control of the money supply.
Posted by Wing Ah Ling, Friday, 10 July 2009 12:32:10 PM
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I totally agree that a whole new monetary system is needed.
Bretton Woods came into being when the world was on its knees and the only country with any money was America. It was inevitable that the USA could dictate the form of the world economy would take.
But things change. We no longer live in a immediate post war economy and America, far from being the only game in town, is now a total liability to the rest of the world.
Time to scrap Bretton Woods and have a system of where countries can trade on an equal status.
Keynes' Bancor was a good idea. No doubt we can improve it but if it had been adopted in 1944 it could not have been worse than the Dexter-White plan that was adopted. I think we would have all been a lot better off.
Posted by Daviy, Friday, 10 July 2009 12:58:15 PM
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"It appears that the US monetary authorities would be very reluctant to surrender their privileges of dollar seigniorage until the outbreak of a major irreversible dollar crisis."

After WW2 the US gdp was about 50% of the world's gdp. This has dropped substantially, but it is still by far and away the largest, shadowed only by the EU. Until a viable alternative is available, the hegemony of the the US dollar is unlikely to change.

Treasury bonds issued by the federal reserve pay interest and have value if so perceived by others. Until China buys euro bonds, thisis unlikely to change, and a prof saying it is not right will not carry much wieght.
Posted by Shadow Minister, Friday, 10 July 2009 3:36:02 PM
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The original conception of the Bretton Woods Institutions was to guarantee global equal treatment through the effective operation of free market principles. Mandella in his biography describes his joy at hearing the outcome of the Atlantic Treaty where the guiding principles were formulated of the Bretton Woods Institutions were formulated. The Global economic crisis has brought home the short comings of the some of the Bretton Woods institutions but these shortcomings have been the subject of considerable discussion priot to that. See for example Stiglitz (Globalization and its discontents) Collier (The Bottom Billion) Sands (Lawless World) all of them have argued that the central failure has been the undue optimism of the possibility of implementing a free market. Smith's original model of the invisible hand was only designed to cover relatively small markets. A global free market to be effective would require all the participants to have perfect knowledge of all the possibile transactions; few would argue that this is indeed possible. Furthermore what few people were prepared to acknowledge is that the success of the USA economy is due to government protection of industries in its embryonic state - free market principles can work to a limited degree in mature economies for emerging economies they can be a disaster.
Posted by BAYGON, Friday, 10 July 2009 6:00:01 PM
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Where has this writer been? The major cause of the present crisis was a failure in the American financial system, where the seriousness of that failure was due to lack of regulation by the Americans. No one is really disagreeing with this. But this does not mean markets have to be overthrown. It means the yanks have to get busy and start regulating their banking system properly.
As for the failure of the international system of money exchange causing the depression to be so prolonged, the author virtually alone in stating this. As is now well recognised the depression was one of a cycle of peaks and troughs which occur in a free market system. The trouble was that the Federal Reserve of the the time reacted to a severe slump by greatly restricting liquidity and allowing a slew of banks to vanish completely (along with their depositor's funds). This time around they increased liquidity in the system and banks were merged or sold off rather than wiped out. Crucially, the depositor's funds survived. Although the slump is a severe one it will not be as deep or as long as feared, and certainly not a patch on the depression.
In the 30s the Americans compounded the Federal Reserve's error by the Snoot-Hawley act which jacked up tariffs on everything. All the other countries responded, further deepening the crisis. Nothing like that has happened this time around.
Thus, although the financial storm has proved to be severe, it will pass and life will go on, albeit with some review of banking systems urgently needed. Markets boom and bust. Its what they do. We simply have to live with the occasional bust. The trend towards free markets will continue. The author will have to find another crisis.
Posted by Curmudgeon, Friday, 10 July 2009 6:06:07 PM
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As an economic innocent I am fascinated by the term "euthanasia of the rentier", which to my untutored mind just seems to be another term for theft. There is nothing new in this, as throughout the ages debtors have sort ways to weasel out of their debts, using methods such as pogroms, confiscation, inflation, and expulsion. To justify this the moneylender has been portrayed as a Shylock, miser, parasite or other antisocial being better removed from society. Why a person cannot choose to delay his consumption until his declining years, instead of blowing it all today has never been fully explained. It reminds me of the early years in Sydney, when everyone in the colony was issued with an equal food ration which they had to eke out over a week. Of course there were those who pigged out in the first few days, and then expected to share in the food that the prudent had saved, resulting in them eating more that the prudent.

One method being used today is for governments to print money, with the inevitable result that no-one will wish to hold such money, which, to have value, must be scarce. As far as I know, no country has ever become prosperous by debauching its currency.

The real need today as I see it is extremely simple. It is for governments, and citizens to live within their means. The current standard of living of the average person is clearly unsustainable, and needs to be reduced substantially. Prudence, frugality and thrift need to become the principal theme of the times, and debt financed consumption seen to be the disaster it is. The secret to success in life is not to spend, particularly on items advertised in the media.

I have one last question for any Keynesians that are left:

If you do euthanaise the rentier, from whom will you subsequently borrow?
Posted by plerdsus, Friday, 10 July 2009 6:27:21 PM
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Mr. Lucarelli, you said ‘anarchy’ instead of disorder. Anarchy, were it to be, would imply the concept of mutuality, totally extraneous to the schools of economists.
Posted by skeptic, Friday, 10 July 2009 8:46:08 PM
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What none of the interventionists will ever explain is how, and from where, government is supposed to get the knowledge and the capacity to manage the money supply. We may *wish* they could. But *how* can they?

We already know governments can't manage the whole economy, even if they have totalitarian powers.

In saying that a particular government intervention is necessary or desirable, we are saying that there is a difference between what the market price is, and what the market price should be - for literally billions of transactions. The idea is that government regulation will manipulate them from where they are to where they should be.

But how will this task be more possible as to part of the economy, than it was as to the whole?

How is government to *know* what the price should be? Will someone please answer this question specifically on point - without assuming what is in issue?

Those who argue that booms and busts are an inherent result of a free market do not account for the fact that, at all relevant times during the 19th and 20th centuries, governments have been actively intervening in numerous ways to change the price of money from what it would be in an unhampered market to what the government thinks it should be.

Now the argument against such interventions is that they result in unintended gross surpluses and shortages in all the wrong places - in terms of money, that means booms and depressions - causing disruption and injustice.

Yet when the entirely predictable, and predicted, result of such government interventions appears, their advocates simply assert that the problem was not enough government interventions. This seems to me to assume what is in issue.

While we get these booms and busts in areas where government is intervening to fix or influence the price level, such as money, we don't get them in areas where the market is not hampered with such interventions, such as with shoes, socks, pizzas, and refrigerators. Why not?
Posted by Jardine K. Jardine, Saturday, 11 July 2009 1:34:53 PM
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So I ask any of the interventionists to explain honestly and directly on point: how is any governmental officer or office to know the difference between the market price, and the supposedly proper price, in billions of transactions? Where will they get the knowledge from?

As subjective valuations are the critical variable in the formation of prices in individual transactions; as they are changing all the time; and as aggregate prices are aggregates of the large number of prices in individual transactions, how is the central planning authority to know what the values are, and how to prioritise them relative to other values?

In the abence of such knowledge, how can the government do a better job of regulating the relevant transactions?

How are they going to avoid systematically favouring one side of the transactions, as they now systematically favour banks and debtors, and rob savers and the poor?

A simple admission that they don’t have the relevant knowledge, capacity or disinterested virtue will do.

If government is to be given such monopoly regulatory power what reason is there to think that they will not use theirs powers to favour their own interests as against those of everyone else? Given that that means ever more inflation, why should not the blame for the recurring booms and resulting busts be sheeted home to government's chronic addiction to inflationary finance, where it belongs?

No-one has given any reason why government should have the power to control the money supply in the first place; nor explained how it will not be turned into an instrument of privilege, exploitation and fraud on a grand scale, which is exactly what has happened.

On the other hand, no-one has explained how, if government control of the money supply were abolished, each person would not have a sufficient remedy against such fraud by exercising the freedom, now legally denied, to simply withdraw his money from a fractional reserve bank, if indeed he ever chose to deposit it in one in the first place.
Posted by Jardine K. Jardine, Saturday, 11 July 2009 1:56:58 PM
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Excellent comment Jardine; the government cannot not know but sadly the same applies for the individual consumer in the free market system. The argument is not simply about intervention versus non intervention. Part of the problem seems to be that politicans generally have not grasped the essentials of of game theory on which they appear to base their economic policies. There are essentially three principles that determine whether a system works: stability, efficiency and fairness. A system is stable if it is in equilibrium (a Nash equilibrium) It is efficient if it is Pareto Optimal. The problem is that there are many different equilbrium points and likewise an efficient system is not necessarily the best system. (The tragedy of the Commons is essentially the unwanted result of one form of an efficient system) to choose therefore among a range of competing alternatives the notion of fairness is invoked. The notion of fairness can be described in terms of "do unto others as you have them do unto you" principle - it seems most cultures have a version of that principle embedded in their ethical systems. The point being that if an economic system adheres to all three of these then there will be few objections to the outcomes. If you want to follow this through then Binmor's book Natural justice is a good introductory text to game theory and its application to economic systems. (Binmore was the person, who using this theory of economic intervention, advised the British Government on the Privitaisation of their Telstra equivalent)
Posted by BAYGON, Saturday, 11 July 2009 3:21:35 PM
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Baygon, the individual consumer only needs to know whether he is ready willing and able to pay an agreed price. It is not a defect, it is not unfair, and it is indeed irrelevant to the question that the consumer doesn’t know a different notional price, that the government arbitrarily says should be the market price.

We can talk about money being a ‘system’.

But the application to human action, and therefore economics, of such mathematical concepts as Pareto optimality and perfect knowledge, promotes more confusion than understanding. It does not describe the reality of the money system either under government interventions, or as it would be without them.

As Murray Rothbard said of such mathematical economics “It’s not junk mathematics, it’s junk economics.”

We can just as well talk about a shoe ‘system’. Ultimately we are describing human action by which a certain real individual is willing to hand over a certain amount of money, to get certain shoes at a certain place and time. To talk of a system is to imagine aggregates of all these related actions by many individuals.

Every single one of the prices that the mathematical economists study contains the necessary element of *subjective * evaluation which bears no constant relation to anything else.

When we see contracts for leather, or transporting leather, or derivative contracts to hedge risk in the future supply of leather, these merely represent people taking action now to adjust the supply of factors of production, with a view to an uncertain future. They do not fundamentally change the fact that the ‘system’ is an artefact of all the actions of many individuals, as concerns shoes, each trying to increase his subjective satisfaction by buying or selling something to someone else.

It is completely illusory to talk of this system as if it were a machine, subject to the laws of physics and mechanics, under the control of an overall designer engineer pulling policy levers and turning policy dials.

It is also nonsense to talk about a system that requires perfect anything to be effectual or permitted because obviously
Posted by Jardine K. Jardine, Sunday, 12 July 2009 6:23:20 PM
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humans being imperfect, it would never be effectual or permitted. Yet shoes and socks and eggs find their way from the producers to us under these imperfect conditions.

And exactly the same applies to the money system.

Governments are made up of people with exactly the same imperfections as people generally. They have *no* superior knowledge, capacity or goodness.

The market uses information about local knowledge and subjective values scales from hundreds of millions of people, which is almost completely unavailable to the officials in the central planning office. How are they going to obtain this dispersed information from millions of people? Answer: they can’t.

Yet without this information, government has no way of knowing whether it would be more economical for a certain factor of production in a given transaction to be used in a certain way, or for something else. It has no way of knowing whether, or how to balance a given supply and demand. Without the signals from the masses of people as consumers as to which values and purposes they consider most urgent as against which others, government is incapable of economic calculation and is flying blind. The results of all its grand plans can only ever be more or less planned chaos, which explains both the problems of the old USSR, and the current GFC.

The use of mathematics adds *nothing* to our understanding of these problems in reality.

Worse, it actively hinders our understanding by providing a cover for the fabulous fictional *assumptions* of omnipotent government that underlie all interventionism.

The problems that the Bretton Woods Agreement Mark II is trying to solve are themselves the *unavoidable* results of central planning.

There is no evidence or reason for the mere assumption that government can deliver a money system that is either economically more productive or ethically fairer than would otherwise obtain. Certainly fraud should be illegal – especially institutionalized governmental fraud!

If government control of the money supply were abolished, there would be no more crisis in the world money ‘system’, than there is now in the world shoe system.
Posted by Jardine K. Jardine, Sunday, 12 July 2009 6:30:48 PM
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Interesting article on how government control of the money supply, by its endless addiction to inflationary finance, removes from everyone the option of saving for their retirement, and forces the whole population in trying to provide for their old age, into speculating on rising equity markets, which has caused the GFC: http://www.lewrockwell.com/woods/woods118.html
Posted by Wing Ah Ling, Tuesday, 14 July 2009 4:44:16 PM
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we need fixed exchange rates established by international agreement for the following reasons

1. failure to fix leads to competitive devaluations to address current account deficits, all these are are defacto tariffs placed on other nations. the devaluations lead to deflation and threaten the financial stability.

2. floating exchange rates have led to overvaluations of up to 50% when comparing baskets of goods in the differing economies (PPP)
3. general equilibrium not possible unless one of the variables is removed making the differential equations representing all markets solvable.
4. floating exchanges divert economic resources from production to speculation
Posted by slasher, Monday, 20 July 2009 11:37:07 AM
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The reference you provide contains a familiar flaw, Wing Ah Ling.

In it, Thomas E Woods postulates that:

>>Under a commodity standard, people could save for the future simply by accumulating precious-metal coins – which, back when they functioned as money, held or even increased their value. No one has that option any longer.<<

Of course they have the option, Wing Ah Ling. They simply buy gold, or silver, or whatever "precious metal coin" their little heart desires.

And when they want to spend it, they simply convert it back into the money that the rest of the world uses.

In one of the YouTube pieces that Arjay pointed me to recently, we saw Ron "Audit the Fed" Paul stumble over this exact problem.

"How would you buy stuff, under a gold standard system", he was asked

"I guess you'd have gold certificates, or silver or whatever..."

Given that a certificate is only a token, and a dollar bill is just a token, and the bits-and-bytes in my bank account are simply tokens - where does the "standard" system win out?

If it is the creation of unlimited credit that you are worried about, then returning to the gold standard would certainly stick a fork into that. And in the process, create an entirely new "world order"...

http://en.wikipedia.org/wiki/List_of_countries_by_gold_production

Mind you, we'd have to face the problem that actually, there ain't enough gold in them thar hills to support a fraction of world trade.

If, on the other hand, it is "saving for retirement" that you are worried about Wing Ah Ling, and you believe that gold is a hedge against inflation, there is absolutely nothing stopping you going out and buying the stuff.

Nothing at all.
Posted by Pericles, Monday, 20 July 2009 2:46:55 PM
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