A Monetary Rule to Live By

“The ‘rules of the game’ was a phrase widely used in the 1920s to describe the workings of the pre-1914 international gold standard,” economist Kenneth W. Dam in his 1982 book, The Rules of the Game: Reform and Evolution in the International Monetary System. “The notion was that the gold standard worked because there were certain rules and they were observed.  Those who used the phrase, we now know, were mistaken about the nature of the rules that governed the gold standard.  But the concept of a set of rules, channeling the behavior of nations and their monetary authorities, is applicable not just to the pre-World War I gold standard but also to each of the distinct international monetary regimes that succeeded it.”

Rules are made to be broken in the current world of international monetary policy.  In Money and the Coming World Order, Johns Hopkins’ David Calleo  wrote: “When the decision of a supranational body conflicts with the strong national interest of important partners, they will resist and, if necessary, disengage from the system.  International bureaucrats, gifted with normal instincts for survival, will retreat from such confrontations.  Those who do not will find themselves deserted.  Such are the realities of our plural world of nation-states, a world in which political divisions only reflect the wide diversity of mankind’s cultural and economic environment.”

Speaking at the 29th Annual Cato Monetary Conference in November 2011, former Wall Street Journal Deputy Editor George Melloan observed: “Fiat currencies are subject to the vagaries of politics.  Highly productive countries can maintain currency stability more easily than unproductive ones because they produce broadly marketable goods.  But even governments of such nations can weaken their currencies through spending and borrowing excesses.”

And rules are needed, but rules plural are not to be confused with “a” rule that governs monetary exchange. Also speaking at the Cato Conference, economist Judy Shelton observed: “Monetary reform is crucial in the wake of the global financial crisis.  If we are to emerge from this prolonged disaster, we must establish a foundation for genuine economic recovery.  The world desperately needs sound money to restore the foundation for sustainable growth versus the artificial stimulus of paper profits unrelated to productivity.”