The world monetary situation: A fresh look

Peaceful heat of exhausted dog-days fluttered around the Federal Reserve Board building on C Street, Washington, DC. It was noon and time for another monthly open-to-the- public “brown bag” seminar. Experience must have taught the organizers not to expect mobs thirsting for detailed research into the fine points of monetary economics. A small, main-level conference room -- big rectangular table in the middle, white board with neatly lined up colored markers -- served as the venue. I might have been the only one that day with a visitor’s badge.

A dozen or so causally dressed and relaxed men and women (fairly young on average) -- PhDs employed by the Research Division of the Board of Governors of the Federal Reserve System -- file in and disperse around the table. Cellophane-wrapped sandwiches, small bags of potato chips, cans of soft drink. Every reason to be expectant. The year is 1999, we are just a few months before the introduction of the euro, and the speaker is a well known professor of money and banking from an Ivy League university. (I withhold names to protect the naïve and spare the university’s fine shield from a chink.)

[...] financial assets just kept growing and the supply kept pace with it until the asymmetry built into the unipolar monetary system began to show its presence, allowing a glimpse into the mismatch between institutional practice cum prevalent thinking and exigencies of a broader, always evolving reality. What’s the answer? Don’t even risk the question! Development of a global money and central bank is the rational answer. But don’t hold your breath. Nothing of the sort can happen before severe hardship serves as catalyst. [...]

[...] But quantitative asymmetry and divergence of interests and advantages between the pivot and the rest of the world will eventually tease out a breakdown. The following three points demonstrate that unipolar monetary systems come with expiration dates even if these remain invisible and unpredictable. The limitations and stickiness of structural changes. Complementary structural transformations incited and facilitated by the international monetary system in the pivot and the rest of the world, respectively like all processes that are subject to constraints must have an economic rationale-dictated end. [...]

[...] There is a world of difference between what a college professor with his T-accounts and mastery of the relevant literature knows and how things really are. It seems that good economics (acute, well-referenced and presented research) emanating from famous chairs and bad judgment about ambient reality are joined at the hip. After the egregious mistake of discounting the feasibility of the euro, some experts now claim that it is about to replace the dollar as the mainstay of international finances and monetary relations. [...]