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THIRTY years from now, Americans, Japanese,
Europeans, and people in many other rich countries, and
some relatively poor ones will probably be paying for
their shopping with the same currency. Prices will be
quoted not in dollars, yen or D-marks but in, let's say, the
phoenix. Te phoenix will be favoured by companies and
shoppers because it will be more convenient than today's
national currencies, which by then will seem a quaint
cause of much disruption to economic life in the last
twentieth century.
At the beginning of 1988 this appears an
outlandish prediction. Proposals for eventual monetary union proliferated fve and ten
years ago, but they hardly envisaged the setbacks of 1987. Te governments of the big
economies tried to move an inch or two towards a more managed system of exchange
rates - a logical preliminary, it might seem, to radical monetary reform. For lack of cooperation
in their underlying economic policies they bungled it horribly, and provoked
the rise in interest rates that brought on the stock market crash of October. Tese
events have chastened exchange-rate reformers. Te market crash taught them that the
pretence of policy co-operation can be worse than nothing, and that until real cooperation
is feasible (i.e., until governments surrender some economic sovereignty)
further atempts to peg currencies will founder.
But in spite of all the trouble governments have in reaching and (harder still)
sticking to international agreements about macroeconomic policy, the conviction is
growing that exchange rates cannot be lef to themselves. Remember that the Louvre
accord and its predecessor, the Plaza agreement of September 1985, were emergency
measures to deal with a crisis of currency instability. Between 1983 and 1985 the dollar
rose by 34% against the currencies of America's trading partners; since then it has fallen
by 42%. Such changes have skewed the patern of international comparative advantage
more drastically in four years than underlying economic forces might do in a whole
generation.
In the past few days the world's main central banks, fearing another dollar
collapse, have again jointly intervened in the currency markets (see page 62). Marketloving
ministers such as Britain's Mr. Nigel Lawson have been converted to the cause of
exchange-rate stability. Japanese ofcials take seriously he idea of EMS-like schemes
for the main industrial economies. Regardless of the Louvre's embarrassing failure, the
conviction remains that something must be done about exchange rates.
Something will be, almost certainly in the course of 1988. And not long afer the
next currency agreement is signed it will go the same way as the last one. It will
collapse. Governments are far from ready to subordinate their domestic objectives to
the goal of international stability. Several more big exchange-rate upsets, a few more
stockmarket crashes and probably a slump or two will be needed before politicians are
willing to face squarely up to that choice. Tis points to a muddled sequence of
emergency followed by a patch-up followed by emergency, stretching out far beyond
2018 - except for two things. As time passes, the damage caused by currency instability
is gradually going to mount; and the very tends that will make it mount are making the
utopia of monetary union feasible.
Te new world economy
Te biggest change in the world economy since the early 1970's is that fows of money
have replaced trade in goods as the force that drives exchange rates. as a result of the
relentless integration of the world's fnancial markets, diferences in national economic
policies can disturb interest rates (or expectations of future interest rates) only slightly,
yet still call forth huge transfers of fnancial assets from one country to another. Tese
transfers swamp the fow of trade revenues in their efect on the demand and supply for
diferent currencies, and hence in their efect on exchange rates. As
telecommunications technology continues to advance, these transactions will be
cheaper and faster still. With unco-ordinated economic policies, currencies can get
only more volatile.
Alongside that trend is another - of ever-expanding opportunities for
international trade. Tis too is the gif of advancing technology. Falling transport
costs will make it easier for countries thousands of miles apart to compete in each
others' markets. Te law of one price (that a good should cost the same everywhere,
once prices are converted into a single currency) will increasingly assert itself.
Politicians permiting, national economies will follow their fnancial markets -
becoming ever more open to the outside world. Tis will apply to labour as much as to
goods, partly thorough migration but also through technology's ability to separate the
worker form the point at which he delivers his labour. Indian computer operators will
be processing New Yorkers' paychecks.
In all these ways national economic boundaries are slowly dissolving. As the
trend continues, the appeal of a currency union across at least the main industrial
countries will seem irresistible to everybody except foreign-exchange traders and
governments. In the phoenix zone, economic adjustment to shifs in relative prices
would happen smoothly and automatically, rather as it does today between diferent
regions within large economies (a brief on pages 74-75 explains how.) Te absence of
all currency risk would spur trade, investment and employment.
Te phoenix zone would impose tight constraints on national governments.
Tere would be no such thing, for instance, as a national monetary policy. Te world
phoenix supply would be fxed by a new central bank, descended perhaps from the IMF.
Te world infation rate - and hence, within narrow margins, each national infation
rate- would be in its charge. Each country could use taxes and public spending to ofset
temporary falls in demand, but it would have to borrow rather than print money to
fnance its budget defcit. With no recourse to the infation tax, governments and their
creditors would be forced to judge their borrowing and lending plans more carefully
than they do today. Tis means a big loss of economic sovereignty, but the trends that
make the phoenix so appealing are taking that sovereignty away in any case. Even in a
world of more-or-less foating exchange rates, individual governments have seen their
policy independence checked by an unfriendly outside world.
As the next century approaches, the natural forces that are pushing the world
towards economic integration will ofer governments a broad choice. Tey can go with
the fow, or they can build barricades. Preparing the way for the phoenix will mean
fewer pretended agreements on policy and more real ones. It will mean allowing and
then actively promoting the private-sector use of an international money alongside
existing national monies. Tat would let people vote with their wallets for the eventual
move to full currency union. Te phoenix would probably start as a cocktail of national
currencies, just as the Special Drawing Right is today. In time, though, its value against
national currencies would cease to mater, because people would choose it for its
convenience and the stability of its purchasing power.
Te alternative - to preserve policymaking autonomy- would involve a new
proliferation of truly draconian controls on trade and capital fows. Tis course ofers
governments a splendid time. Tey could manage exchange-rate movements, deploy
monetary and fscal policy without inhibition, and tackle the resulting bursts of
infation with prices and incomes polices. It is a growth-crippling prospect. Pencil in
the phoenix for around 2018, and welcome it when it comes.