Post By gaia1 in Transformation versus reform
TO REFORM OR TO TRANSFORM?
April 2, 2011
This is the 10th post on this important question which shows the basic choice in approaching a change strategy to the international monetary system. Based upon the following six categories of shortcomings the strategy is to be one of transformation rather than reform. In order to deal with this century’s greatest challenge of controlling climate change the reformist route has also potential by having an international reserve asset be developed that is based upon environmental bonds. However, given the need for a global governance system that is organized around the climate change challenge, the transformational route is preferable. In such global governance system the international monetary system becomes its linchpin. The following pages are from the penultimate draft of the Tierra Solution book.
Summary of categories of shortcomings
Using contextual sustainability framework and its applications to economics, trade and development in the global North and South the first major shortcoming of the international monetary system is its adherence to a free market philosophy with its outdated economic and financial theories that influence monetary policies. It is this philosophy that stands in the way for an enlightened US monetary policy that is both beneficial both domestically and internationally.
A second category of shortcomings are the financial imbalances that are inherent in the system on account of the imbalances in the current and capital accounts in nations’ balance of payments. Related to these imbalances are the unregulated capital flows that can enter and leave economies with the hitting of a couple of computer buttons.
A third category of shortcomings deals with the volatility of exchange rates and disputes about managed and flexible exchange rates. The volatility led to widespread currency speculation, while quite a few countries engaged in currency manipulation to promote their exports. The inability of the G20 to resolve these exchange problems has led to have foreign exchange companies construct their own world currency such as the Wocu. It also has led to a steady increase in the gold price, starting with some $300 per troy ounce in the 1970s to some $1440 in spring 2011 with a prediction that it may go up to some $5000 within the next five years.
A fourth category of shortcomings deals with the presence and the operation of a costly global reserve system that is needed on account of the lack of a monetary standard which would make national currencies convertible or lead to a world currency. Such standard would replace the need for the various proposals of non-national reserve currencies such as the SDR or other currencies based upon a basket containing a greater number of currencies or some sort of global purchasing power parity.
A fifth category of shortcomings deals with the liquidity problems in the present system. There is no global lender of last resort that is able to infuse credit and liquidity when financial crises occur. Thus, it is a significant event that during the financial crisis the big French-Belgian bank Dexia borrowed some $30 billion from the discount window at the US Federal Reserve during 2008 and 2009 and smaller amounts at the end of 2009.[i]
A sixth category of shortcomings deals with the moral shortcomings of the monetary system on account of the unfairness of its seignorage system, the payment of very low interest rates for funds from non-reserve currency countries, weakness of procedural justice in voice and representation at the IMF and other IFIs, and last but not last lack of consideration of climate justice.
Given these various serious and systemic shortcomings the question has to be raised whether the system is to be reformed or transformed, i.e. changing the present form or changing to a new form that transcends the present form.
To reform or to transform?
The answer to this question depends upon one’s criteria to assess the present international monetary system: low criteria lead to the reformist option, strong criteria lead to a search for the transformational option.
Perhaps one of the best presentations of present day reformist thinking took place in early March 2011 at the IMF 2011 research conference. Notwithstanding its name of New Ideas for a New World, a series of interviews of participants by the external relations division of the IMF [ii] the new monetary ideas were not matched with the requirements of a new world that, once and for all, would abandon the tenets and practices of free market capitalism. [iii]
While the above UNDESA and UNCTAD reform proposals deal with the shortcomings of the global reserve system in an attempt to make the system more workable, they do not address most of the systemic shortcomings of the international monetary system itself. As long as the international community remains unable to establish an intrinsically valuable monetary standard, the reserve system problem will be with us.
In response to my question “Should and could the international community devise a monetary standard that would make reserves such as the US Dollar and SDRs unnecessary and thus remove the costly global reserve system?” economist Erturk wrote that “getting rid of reserves as such does not strike me as viable even as an abstract possibility”. On the other hand investigating how environmental objectives can guide the fashioning of alternative reserve assets is potentially a very fruitful way of improving the global reserve system. He thinks the real policy challenge is “to figure out how to use international development bonds as reserve assets. In principle, I suppose, that could also be green bonds, provided that the political will is there.”[iv] This clear answer shows the differences between a reformist and a transformational approach: an environmentally based reserve system versus an environmentally based international monetary system that would function as the linchpin for a global governance system that aims to control climate change. The choice made in this book is the latter approach.
In last instance such transformation will depend on the question whether this process of monetary evolution will be intelligently directed or whether it will simply be driven by events. Economist Judy Shelton answered that question in her 1999 testimony before the US House or Representatives Committee on Banking and Financial Services. In her opinion, political leadership can play a decisive role in helping to build a more orderly, rational monetary system than the current free-for-all approach to exchange relations. She concluded by stating: “Ideally, every nation should stand willing to convert its currency at a fixed rate into a universal reserve asset. That would automatically create a global monetary union based on a common unit of account. The alternative path to a stable monetary order is to forge a common currency anchored to an asset of intrinsic value.”[v] Her “universal reserve asset” could be an environmentally based asset—a reformist route—or her “asset of intrinsic value” could be a carbon standard—a transformational route.
[i] The New York Times, April 1, 2011
[iii] If the IMF participants would have spent a session on discussing Ha-Joon Chang’s views of the world economic system, some genuinely new and important ideas could have been accepted as building blocks of their vision of a new world. More promising than the IMF conference would probably be the Soros Bretton Woods conference in April 2011 where Cambridge professor Chang is a speaker.
[iv] Email of January 24, 2011