Lets say that a Republican presidential candidate is prepared to do everything right to spur economic growth. This person has a sensible plan for reforming the tax code, rolling back excessive regulations, cutting government spendingeven tackling entitlement spendingand achieving a balanced budget within a reasonable time.
Is that a sufficient formula for more robust economic growth? Certainly, its a good one. All those changes are necessary. But what happens if continuing turmoil in global financial markets and the dislocating effects of shifting exchange rates persist in undermining the economic progress we seek as a nation? Those who lament the fact that our new normal growth rate of 2 percent compares unfavorably with earlier decadesparticularly the 1950s and 1960sshould note that the distinguishing feature of that era was the existence of a functioning international monetary system.
Stable money is the critical missing element that needs to figure prominently in any viable GOP plan for economic growth. Amid the day-to-day drama of central bank maneuvering to stimulate economic growth through large-scale asset purchases and negative interest rates, we have lost sight of the fundamental difference between global monetary arrangements today versus in the past.
Is it merely coincidental that the higher rates of economic growth and lower incidences of financial instability attained in the post-World War II years are closely aligned with the time period during which the Bretton Woods fixed exchange-rate system operated?
It bears taking the time to examine the data. In a study published by the Bank of England (BOE) in 2011 entitled Reform of the International Monetary and Financial System, monetary regimes in effect over the past 150 years were evaluated in terms of three objectives:
- enable countries to use macroeconomic policies for achieving non-inflationary growth;
- facilitate the efficient allocation of capital by allowing flows to respond to relative price signals; and
- help to [minimize] the risks to financial stability.
The BOE study compared world economic performance under the gold standard (from 1870 to 1913) and the Bretton Woods gold exchange standard (from 1948 to 1972) with respect to our current monetary arrangements (from 1973 to 2008) to see how well each approach satisfied the criteria for a well-functioning international monetary and financial system.
The gold standard was judged to have performed reasonably well in terms of providing financial stability and the efficient allocation of resources, but was marked down for curtailing domestic policy autonomy. Under a gold standard, individual central banks cannot use monetary policy to achieve domestic economic goals; whether that is a good thing or a bad thing is debatable.
But what is beyond argument is that the Bretton Woods system scored extremely high against the prescribed metrics. According to the BOE study, the Bretton Woods era coincided with remarkable financial stability and sustained high growth at the global level. Those solid growth outcomes were not simply the result of post-war reconstruction efforts, the analysis specifically notes, since growth in real per capita gross domestic product (GDP) was actually slightly stronger in the 1960s than it was in the 1950s, at 3 percent annually.
The undisputed loser among monetary regimes is our current one. Against a range of metrics, todays system has performed poorly, the BOE study concludes. The current system has coexisted, on average, with: slower, more volatile, global growth; more frequent economic downturns; higher inflation and inflation volatility; larger current account imbalances; and more frequent banking crises, currency crises and external defaults.
Its a sobering assessment. What can our nation, or any nation, hope to accomplish in terms of productive economic growth under conditions of looming financial crises and unpredictable currency swings? Its time for the United States to acknowledge that it has a significant vested interest in procuring global monetary stability as a necessary condition for achieving higher economic growth.
And its important to recognize the importance of economic growth not only in quantitative terms, but also for its qualitative aspects. The 2015 Economic Report of the President compiled by the Council of Economic Advisers states that the ultimate test of an economys performance is the well-being of its middle class. It defines that measure as being shaped by three factors: how productivity has grown, how income is distributed, and how many people are participating in the labor force.
This more recent report focuses on the U.S. economy and includes a section that examines the history of middle-class incomes in the postwar period. Corroborating the BOE study, it likewise includes a glowing assessment of economic performance during the years when the Bretton Woods monetary system was in effect. All three factorsproductivity growth, distribution, and participationaligned to benefit the middle class from 1948 to 1973. In the report, this time in our nations history is described as the age of shared growth when the middle class enjoyed the best of all economic outcomes due to rising labor productivity, falling income inequality and broad participation in the work force.
It was also a time when international trade and capital investment decisions were conducted against a backdrop of stable exchange ratesand the economic benefits accruing to participating nations were appreciated rather than decried.
The Bretton Woods system relied on gold convertibility of the U.S. dollar as the anchor for global monetary stability. That doesnt mean that any new international monetary system would necessarily have to utilize gold. But given that virtually all central banks maintain gold reservesindeed, central banks aggregate gold holdings increased in 2015it would certainly make sense to consider using gold as a neutral reference point.
How else can we begin to tackle the contentious issue of currency manipulation? What is the benchmark for deciding whether a nation is deliberately devaluing its currency to gain a trade advantage? Does it really matter whether todays debilitating exchange-rate swings are being orchestrated by central bankers rather than governments directly intervening in foreign exchange markets? For victims of currency warfare, the economic damage is done either way.
As the disruptive effects of global monetary disorder continue to take their toll on economic growth, we need to focus on how best to establish a stable monetary foundation for the real producers of the worldand quit accommodating the currency speculators.