Regional Compromise in Forex

Within each bloc, there should be fixed rates with narrow bands; between blocs, flexible exchange rates (whether freely flexible or guided, deponent generally sayeth not).

This proposal fits into the monetary integration of the European Economic Community and emerges from somewhat larger "optimum currency areas" -but not so large that they cover the whole world. The benefits of specialization and exchange are kept by regions. Political independence is retained by the major power blocs. Presumably within each bloc there would be a dominant power or powers and those that were followers. Political sovereignty would be gained for the former but more thoroughly lost for the latter. African trade would run to Europe, and Canadian and Latin-American trade to the United States, regardless of the Argentine and Uruguayan market for meat in Europe or the' interest of the United States in African chrome.

With national moneys and flexible exchange rates which were guided by the intervention of the monetary authorities, the power of various countries to set their own exchange rates, in case they disagreed, would probably be proportional to their size as measured by some weighted average of national income and national capital market: if Canada wanted a depreciated exchange rate, for example, and the United States were determined to resist such an outcome, it seems clear that the United States could buy up Canadian dollars as fast as the Bank of Canada could issue them.

Under the gold standard, where all countries have pious faith in the rules of the gold standard game and are committed to follow them, no country has much more power than another. The other two forms of international money, however, are otherwise.

Under, say, the dollar standard, power is distributed asymmetrically to the system. With something like the SDRs as international money and no tendency of markets to shift: to national money, power would be distributed in accordance with the weighted voting system.

If responsibility and power go together, an asymmetric distribution of power may not be altogether a bad thing for the international monetary system. Weighted voting often turns out to produce stalemates, as it has now done in the International Monetary Fund as well as the Security Council of the United Nations. The United States started out in the IMF with a size of quota and a weighted vote that enabled it to veto any proposal which it did not approve.

The United States had somewhat over 23 percent of the votes, and 85 percent of the votes were needed to carry a proposal. Later, with the enlargement of quotas and the General Arrangements to Borrow, the Europe of the Six acquired 20 percent of the votes, and a veto. The IMF could not act unless the EEC and the United States agreed.

Under the dollar system, or the sterling system before 1913, power with responsibility is not only tolerable; it may be desirable. Without leadership, little gets done. For the world monetary system to be stable, moreover, the world needs a stabilizer, some country or aggregation of countries not bound by vetoes or stalemate which will move in crises.

The needs are to keep markets for distress goods open, fix a set of exchange rates which are not too far horn equilibrium, maintain stable capital flows, and discount in a crisis. Britain performed these functions in the late 19th century up to 1913.

The United States took over the task in the period from World War II to about 1968. The depression of 1929 was so wide, so deep, and so long because Britain couldn't and the United States would not act as a stabilizer. The fallacy of composition reigned supreme as each country in turn tried to use its national sovereign powers to cut imports, restrict capital exports, and depreciate the exchange rate.