Robert Mundell’s New World Order

Canadian-born Nobel Memorial Prize in Economics winner (in 1999, for his work introducing the Euro) has a new idea he feels could drag the global economy out of the quagmire it finds itself in.

Historically, gold has been the standard with which our markets trade – the common financial language we all communicate in. The problem is, according to Mundell, there is no world government to exist alongside this currency and to properly monitor its performance.

With the dollar taking a severe beating over the last decade, Mundell believes the time has come for us to consider an alternative vessel by which we can talk to each other about economics – a new world currency, and the new world order that brings with it.

Central banks across the world store reserves of gold, US dollars and sometimes Euros, to cover international payments and to cover for global fluctuations. Mundell’s thought of a new world currency seemed to be back on, after the recession hit. He feels this new measure would prevent the current cycle of recession (1 in every 5-10 years) from being this devastating the next time it hits.

Preventing the next recession is an economic impossibility, and a highly impractical idea as well. Every economy must go through good and bad cycles; quarters of profit, quarters of loss and others of stagnation. Recessions are the means by which we measure our growth and progress, and they also act as an excellent report card for our financial performance.

Mundell’s model hopes to end the cycle of exchange rate fixing and manipulation, which is what he believes led to the fall of the Asian stock market and the resulting financial crisis, in the 1990s. Exchange rate volatility has been blamed by several economists as the reason for this fall.

He believes if we gradually peg all global currencies together, this exchange rate mechanism will not fail us again. Starting with the largest currencies of course, the US dollar and the Euro. Many nations – such as Hong Kong and Panama – are already pegged to the dollar.

Pegging exchange rates is essentially a method by which one nation’s currency value is attached, compared or matched to another’s, or to a basket of currencies and goods. It’s a means by which we understand the relationship between two currencies better; evaluate one’s performance over the other; and make sure that the two (or more) markets in question are tied to each other. For volatile currencies in unstable parts of the world, it can be a great way to ensure some form of stability.

Robert Mundell saw a benefit to this, and introduced the idea of the Euro in the 1960s. It took over 30 years for states to agree to this mechanism – politically and economically, there was a lot to consider. With 16 member states, the Eurozone is our first example of a simple fixed exchange rate mechanism made applicable to a continent and manifesting itself in a new currency. The ECB and common market rates prevented protectionist methods and resisted this idea initially; interest rates were hugely affected as a result of this new policy decision.

Mundell regularly meets international economists and thinkers to hash out policy ideas and thought. Paul Volker, former chairman of the Federal Reserve; Domingo Cavallo, former Economic Minister of Argentina; Miranda Xafa, Executive Director of the IMF; Benn Steil, author of ‘Money, Markets and Sovereignty’ and various others have all commented on this new idea and its applicability.

Steil adds a dimension to this proposal, saying that once money is involved, politics instantly becomes a factor – for nations, their currency is a “useful way to assert control”; he also says that change should come to the way our economy operates, since this is the “most liberal trade and investment system, internationally, that we’ve ever seen.”

Professor Michael Pettis, Finance Professor at Peking University, further comments on the hurdles ahead for Mundell’s idea: “If Europe can’t function with a single currency, the idea that the world will function with a single currency…is a total pipe dream.” He sees the Euro as a currency still very much in its early stages, one that hasn’t been tested for its durability yet. It could fail miserably, and we haven’t reached that fork in the road yet.

Global reliance on the dollar has meant that it could become our global currency, if we sign up to one. A decade ago, or earlier, the idea might not seem so bad – but with interest rates being what they are now; the mess that is the trade deficit and the appalling exchange rates; why would we even consider such an option at this time?

Let’s take the issues one by one – starting with Dr. Pettis’ argument. Financially, what can be said for and against a global currency? As it stands, we have global financial institutions – the World Bank and IMF could well become our new powers. With this new currency, the balance between nations and regions would have to change.

The United States remains the only country on the Board of Directors at the World Bank with special drawing rights (SDRs). The IMF defines an SDR as “an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. Its value is based on a basket of four key international currencies [the Dollar, the Euro, the Yen and the Pound], and SDRs can be exchanged for freely usable currencies. A country participating in this system needed official reserves—government or central bank holdings of gold and widely accepted foreign currencies—that could be used to purchase the domestic currency in foreign exchange markets, as required to maintain its exchange rate.”

SDRs and their management tell us a lot about who the leader in this new world order will be; the new balance of power; and the strength needed from the new monetary system. What this new model will mean, upon its successful implementation, is that there will be global free trade, complete financial integration and a complete end to currency speculation. Aside from the obvious fact that we will all trade in one currency.

Our books will be in the hands of a global bank, probably a mesh-up of the World Bank, IMF, Federal Reserve and European Central Bank.

We’d be sacrificing our economic sovereignty to the whim and will of a global free market. With the spread of global free trade, countries will no longer have a mechanism by which to defend their currencies, goods and services, and balance of trade mechanism.

Economic cohesion will also mean that the basket of goods with which economic prosperity is measured will change. In certain regions of the world – such as sub-Saharan Africa and countries in Latin America, trade in agricultural produce accounts for a huge portion of export earnings and this, balance of trade revenue. In industrialised nations, such as Japan and China, this portion is taken up by manufactured goods.

When we all homogenise, what will the new basket of goods look like? We can’t have equal measures of agricultural (aka primary) products and manufactured (aka secondary) goods. A proportional relationship between these sectors would not reflect the real economic conditions. Neither would a disproportionate basket. That’s a fairly large hurdle to overcome.

If that doesn’t sound devastating enough – the slow homogenisation of our currencies, economies and monetary policy, there’s more. On to Steil’s point. What do we do about a small little thing we call free will and political determination?

Our currencies are our politics, our stamp of identity and our means of trade with the international community. Currency notes have our heads of government or state printed on them; they have important landmarks sketched on them. This would all be sacrificed.

More than that, we’d have to all agree on common monetary policies and fiscal policies. We’d have to all agree to trade in certain methods, to handle our exchange rates a certain way, and to control our market mechanisms in a precisely tuned fashion.

How exactly would one go about getting China and the US to agree on monetary policy?

How would the various tribes and identities in Africa have to adjust their business and economic practices to fit in with those of tribes in Australasia?

Robert Mundell may believe that this mechanism would stop the cycle of recession and expansion – but if it’s a natural economic phenomenon, why change it? Why not monitor domestic and regional institutions better? How about not allowing one country’s financial industry to dictate the economic situation for the rest of the world? When we are facing problems as a result of our connections and economic relations, is it really the best time to declare a homogenisation of economics and markets?


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