My favorite quote was:
(A common gold currency) is really very easy to do,
but Mundell knows it must be made to sound difficult
because the thousands of people making six-figure
bureaucratic salaries need to justify their wages and
the myriad conferences they hold from spa to shining
spa.
Heh. Sounds like me.
JMR
Subject: More on Mundell's Nobel Prize
From: "R. A. Hettinga" <[EMAIL PROTECTED]>
Date: Wed, 31 Oct 2001 08:41:24 -0500
http://www.polyconomics.com/searchbase/10-14-99.html
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Related Links:
SSU Guest Lecture by Robert Mundell
Yahoo! Coverage of Mundell Winning Nobel Prize
Buy Debt, Deficit and Economic Performance, co-edited by Robert A. Mundell,
at Amazon.com October 14, 1999
More on Mundell's Nobel Prize
Memo To: Robert L. Bartley, Editor, The Wall Street Journal
From: Jude Wanniski
Re: Celebrating Mundell
As much as anyone, Bob, you deserve credit for the Supply-side revolution
in economic theory for which our friend Bob Mundell now is being
celebrated. Most of the press corps thus far is avoiding crediting Mundell
with supply-side economics -- assuming he got the prize only for his
insight on optimal currency areas -- but still, it was from that beginning
that led Bob to the essential designs of Reaganomics. In the last dozen
years, alas, while the Bush and Clinton administrations have been
conducting a read-my-lips counter-revolution to the supply-side, you have
been the only journalist in the universe who has maintained an interest in
Bob's opinions. In March of last year, on the 24th and 25th, you
practically gave the entire editorial page to Mundell and his views on the
euro. I don't think anyone in the history of Dow Jones & Co. was ever given
that kind of space. Bob should have gotten the Prize last year, but now
finally, he is recognized. You should also make sure your readers know
about his website:
http://www.columbia.edu/~ram15/
Here is the piece I wrote for Polyconomics clients on March 25, 1998 about
Bob's spread on your pages.
MUNDELL ON THE EURO
Many of you probably took the time to read the WSJournal op-eds yesterday
and today by Robert Mundell, the most important economist of our time. The
unprecedented amount of space given the treatise on the euro by Bob
Bartley, the editor of the Journal, is only one indication of its
importance. Lengthy treatments on the euro are appearing everywhere, but I
have not seen any that are worth commenting upon or reprinting for you
until Mundell's. Despite the fact that he has not yet won a Nobel Prize in
economics, his students are in important positions throughout the universe
of international financial institutions. What he has written for the
Journal will be taken seriously in Brussels as the euro architects attempt
to figure out how to make it work when it is introduced next year. Mundell,
now 65, was the Canadian wunderkind who became chief international
economist of the International Monetary Fund in 1961, when he was 28. He
was the prime mover in reviving classical economic theory, which became
known as supply-side economics in the late 1970s. However, his ideas were
defeated at the IMF in the 1960s by the neo-Keynesians, led by James Tobin
of Yale, where they still hold sway under the leadership of Michel
Camdessus.
In recent years, I've asked Mundell several times about the lack of
progress on the design of the euro, specifically how the Europeans could
ever hope to make it work without a gold anchor. Mundell, who thinks in
terms of epochs, dismissed my concerns and said that as they got closer to
the target date, they would realize they will have to think about gold. He
seemed to think that to bring up the subject before they were ready to
think about it would be a waste of time, which is why his decision to speak
out now suggests the timing is right. Some of you who read Part I in
Tuesday's WSJ may have wondered how he could devote so much space to
discussing the wonders of the euro without mentioning gold. I said we would
have to wait for Part II, as I expected Mundell would "sneak gold" into the
equation. I remember Mundell telling me more than 20 years ago that gold
would have to be "snuck" into the new international monetary system when
the world was ready for one, because it was so demonized by the economics
profession after WWII. In order that President Richard Nixon be persuaded
to abandon gold in 1971, the demand-side economists representing both
Keynesians and monetarists had to ridicule it as a "barbaric metal,"
according to the former, or "no better than pork bellies," in the words of
the latter.
In today's Part II, he does indeed sneak gold into the equation, on
tip-toes. First he gives us a history of monetary events since the first
world war, when the dollar replaced the pound sterling as the dominant
money. I disagree with many things in Mundell's account of this history,
but I've also learned over the years that when he writes in this manner, he
speaks in the language of the Keynesians in order to influence them in the
direction he wishes them to go. Mundell, for example, does not believe a
nation's "savings rate" is important, but in his piece today he warns it is
too low, because it is a matter of faith among the demand-side
professionals that this is so. He also warns about the continued use of the
dollar as the primary currency for the world, in order to assure the
Europeans that he is not a nationalist on these matters: "While the dollar
will continue to be an important part of the international monetary system
-- and perhaps remain the most important currency for years to come -- it
is no longer necessary or even healthy for the U.S. or the rest of the
world to rely solely upon the dollar." We can see the Eurocrats smiling at
this.
Amidst all the silly talk about the euro making gold obsolete for European
central banks, with predictions they will sell it and send its price
plummeting, Mundell introduces a note of caution (a stick) and a word of
promise (a carrot). Now we see him sneaking gold into the euro. "It would
be a mistake to think that Europe's interest would lie in dumping large
stocks of gold in a sell-off. None of the big holders have any interest in
depressing the price of an important reserve asset. But Europe may find
that its gold holdings have a hitherto unnoticed use in building confidence
in the euro." Yes, the euro eventually will be a great currency, taking its
place alongside the Roman denarius, the pound sterling of the British
empire, etc., as Mundell gushes forth praise. Alas, "It is also necessary
to note, however, that the euro will have two unique weaknesses compared to
its great predecessors. First, the euro starts out as a pure fiat currency
not linked to gold. Second, the euro is not produced by a strong central
state. These weaknesses would be potentially lethal were it not for two
mitigating factors: Europe's large gold reserves will help to overcome the
first weakness. The second weakness will be overcome in the short run by
the military alliance of NATO and in the long run -- perhaps -- by European
political integration."
The NATO stuff is also window dressing for what comes next. Mundell posits
the likelihood of a chaotic transition, as central bankers and other
portfolio managers shift from one set of reserves to another. The dollar
could get pummeled. "Both the EU and the U.S. would need to take strong
defensive action to ease the transition. Neither area would welcome a
significant depreciation of the dollar. It is unlikely, however, that
bilateral handling of the problem would be amicable. It would be safer to
recognize that a problem will exist and create an institutional framework
for dealing with it. (One possibility would be to establish a 'conversion
account' under the auspices of the International Monetary Fund, authorized
to accept deposits of gold, dollars, and euros in return for credit
balances denominated perhaps in Special Drawing Rights, redesigned to
account for the euro.)"
Aha, there we have it. If such a mechanism were created, the euro would be
defined in terms of gold and so would the dollar. No other possibility
exists. The dollar currency area that covers the western hemisphere and the
euro currency area that covers the most productive part of the eastern
hemisphere would be on a gold standard. (Shhhh, Mundell would say. It is a
"conversion account.") What about Asia?: "It is probable that monetary
union in Europe will provoke steps toward an Asian monetary bloc,
spearheaded by Japan, China or the members of the Association of Southeast
Asian Nations." If asked, my guess is that Mundell would tell you that the
Asian member nations of the IMF would have access to the "conversion
account" as long as they deposited gold or dollars or euros, and agreed to
abide by the convertibility rules. Japan has already signaled a willingness
to discuss an Asean currency bloc. You may remember my "Open Letter to
Anwar Ibrahim" of Malaysia (10/14/97), urging him to get the Asian/Islamic
world together behind a common gold currency. It is really very easy to do,
but Mundell knows it must be made to sound difficult because the thousands
of people making six-figure bureaucratic salaries need to justify their
wages and the myriad conferences they hold from spa to shining spa.
When you puzzle at the steady upward march of the Dow Jones Industrial
Average, always remember that the upside has to do with the peace dividend,
which will continue as long as peace exists. Mundell may have lost to the
Keynesians when he was 28 years old, but he is a patient man, and still not
too old to enjoy sweet victory. The senior staff of the IMF threw him a
65th birthday party last fall. He also celebrated a few weeks later when
his wife Valerie gave birth to Nicholas, the newest supply-sider, another
peace dividend.
Jude Wanniski
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