Escaping the Grip of Global Finance By Robert Pringle
Robert Pringle’s The Money Trap should be very high on the list of books for anyone wanting to understand the weaknesses and flaws in the existing approaches to national monetary and banking policies and the international arrangements that link them.
Pringle, who brings decades of study of the financial system including as founder and editor of the journal Central Banking, provides a very readable history of the current system’s (or non-system’s) evolution and a succinct analysis of its flaws.
These flaws concern above all the weaknesses of international coordination of money and banking policies in a world of relatively free trade, the lack of a real anchor for the value of money and the excessive and pro-cyclical elasticity of bank credit. As a result, one asset bubble and bust follows another with unnecessary damage to lives and economic prosperity. Central banks and bank regulators learn the lessons of the last war and are blindsided by the next one.
Pringle recounts the shock felt around the world when Richard Nixon scuttled the gold (exchange) standard, introducing a monetary nationalism that carried with it highly volatile exchange rates between unanchored national currencies. Such volatility was not inevitable, but was rather the result the US’s unwillingness to take into account the international consequences of its domestically focused monetary policy. The US was willing to provide the world’s reserve currency but not willing to play by the rules required by that role.
The post Bretton Woods era of floating exchange rates, substituted central bank independence and price stability for the anchor of the gold standard and achieved a considerable measure of success (the great moderation). Pringle reviews policy options including nominal GDP targeting, inflation targeting, monetary targeting and exchange rate targeting or pegging. But without international coordination, economies like Cayman fixed to a major currency (the US dollar) suffered from the wide swings in the exchange rates between, for example, the dollar and the Euro.
The fiat money, floating exchange rate system has entered a trap.
“Thus in 2002-07 monetary authorities, scared of deflation,… let real interest rates fall to extremely low and sometimes negative levels – further encouraging over-borrowing and lending. This relaxed approach plainly did not succeed in the long-run; indeed, temporary success seduced policy-makers into actions that had the long-term effect of worsening the eventual crisis and bringing about the near-collapse of the financial system.” (Pringle p. 83) And they are at it again.
The existing non-system has produced unsustainable trade imbalances, a large, potentially destabilising (to the US dollar) overhang of foreign exchange reserves by China, Japan and many other non reserve country central banks and trade limiting volatility of exchange rates. The domestic monetary policy successes of, for example, Paul Volcker at the Federal Reserve or Karl-Otto Pöhl at the Bundesbank, had “their achievements… undone by international capital movements, government meddling, fluctuating exchange rates and excessively elastic credit systems.” (p.175)
Unlike most accounts of today’s systemic weaknesses, Pringle integrates those of the monetary system with those of the financial/banking system. “A poisonous interaction was set up between banking and political stability. Policy makers were scared to let borrowers default on their debts and let the private sector take its share of the losses, because that would further weaken the banks, which already held so much sovereign debt.” (p.101)
“The main macroeconomic cause of the financial crisis was not ‘excess saving’ but the ‘excess elasticity’ of the international monetary and financial system.” (p.132)
The second half of The Money Trap explores options for a reformed international monetary and financial system. “Monetary sovereignty is incompatible with globalisation, understood as integration into the global market place for goods and capital1.”
“In a globalised economy, an international monetary order is required to maximise the practical freedom of individuals and businesses to conduct their affairs as they wish.” (p. 250) “It should mimic the classical gold standard in enabling monetary, commercial, and economic unification to take place without requiring political integration.” (p.250)
Pringle discusses alternative real anchors to money’s value including my own2.
“The unit of account function of money is, like language, a natural monopoly – the more people that use it, the better.” (p.251) ‘The key step is for major governments to agree not on a common currency but on a common unit monetary unit of account in which citizens can have confidence.” (p.279)
“Money is not properly used as a weapon of social control. When it is over-used for such statist ends, it loses, over time, its more basic functions in society.” (p.288)
Governments do not provide growth. “What governments could and should provide [is] a robust framework, a money and banking standard, and rules of the game. Money itself can be the compass. Then growth might develop of its own accord.” (p.280)
Pringle’s proposals for financial sector reform go further than Volcker rules or ring fencing of banks now being considered in the UK. The scope of bank activities, as the core of our payment systems, should be severely limited while leaving the rest of the financial system to largely regulate itself.
“Markets… need boundaries and rules, otherwise they cannot fulfil their role of coordinating and reconciling differing policies and preferences in the common interest…. It should be a system that did not give excessive discretionary powers to the state or its agents (which yet again could be subject to abuse) AND that would be sufficiently robust to contain the powerful forces of international finance.” (p.198)
Pringle’s discussion of options for the banking system, however, is rather spotty and conclusions are sometime asserted.
Pringle wants real reform and outlines paths that might ultimately produce it. The incentives that led the US to block earlier efforts at reform may now lead it to support them.
“It is not comfortable to be a reserve currency centre in decline. Those massive overseas holdings of your currency, which (while they were being built up) had once enabled you to spend comfortably in excess of your means, suddenly come to be seen as a burden.” (p.225)
“The future of the global financial system will be shaped both by organic, market-driven evolution and by political action. The opportunity to move to a better system must not be wasted.” (p.267)
The Money Trap is a must read for those interested in this project.
- Steil and Hinds, Money, Markets, and Sovereignty (Yale University Press, 2009), See the review at http://www.compasscayman.com/cfr/2010/10/05/Money,-Markets—Sovereignty/
- “Real SDR Currency Board”, Central Banking Journal XXII.2 (2011),