Globalization is making central banks obsolete, said Jerry L. Jordan of the Federal Reserve Bank of Cleveland at the Cato Institute's 17thAnnual Monetary Conference, "The Search for Global Monetary Order," on October 21.
"If monetary sovereignty or independence is not worth much in today's global capital markets, and if seignorage is quite small in a noninflationary world, then the costs and risks associated with a national central bank and a national currency become harder to justify," Jordan said. He also opined that international organiza-tions such as the International Monetary Fund might have a useful role as "financial night watchmen" for the interna-tional economy, rather than as active players. "A common element of all financial crises of recent years was the existence of government guarantees—to pensioners, producers, intermediaries—that were revealed to be unsustainable. The sooner the revelation, the better countries were equipped to eliminate the distortions without a crisis, and to this end an international organization might truly add value."
Do we need a new Bretton Woods, the system of fixed but adjustable exchange rates designed at the end of World War II? No, answered Anna Schwartz of the National Bureau of Economic Research. "A new Bretton Woods system is not needed so long as independent central banks worldwide set as their primary goal an inflation-free economy, as indeed is the case in the advanced industrialized countries." Judy Shelton of the DUXX Graduate School of Business Leadership in Monterrey, Mexico, said that a new Bretton Woods could help solve international monetary disorder but that the new system shouldn't be designed by government. "The new Bretton Woods will be established as a result of private initiative, inspired by technological innovation, and dedicated to the consumers and producers of the world." She pointed out that with a number of online companies already providing more choices for consumers, there will be a demand by consumers for "a form of global money that functions as a legitimate tool of private commerce, not a policy lever for government."
One of the issues at the forefront of monetary policy is whether Latin American nations should make the dollar their official currency. William A. Niskanen, chairman of the Cato Institute, argued that "our government should not promote a general dollarization of Latin America. Our government should accommodate the dollarization of any specific Latin American country, if requested by its government for its own reasons."
Economists Allan H. Meltzer and Ronald I. McKinnon continued their long-running dispute over monetary policy in Japan. Meltzer contended that Japan is not in a "liquidity trap," so expansive monetary policy would effectively devalue the yen against the dollar and restore Japan's competitiveness. McKinnon disagreed, arguing that expansive monetary policy would be a mistake and what Japan needs to do is to stabilize the long-run value of the dollar/yen exchange rate by entering into an agreement with the United States. Printing more yen now would only undermine the future value of the yen. Thus, "the fear of future yen appreciation [against the dollar] could still remain and even be strength-ened."
Other speakers at the conference included Peter B. Kenen of Princeton University, Leland B. Yeager of Auburn University, Alan C. Stockman of the University of Rochester, Charles W. Calomiris of Columbia Business School, David Malpass of Bear Stearns, George Selgin of the University of Georgia, and Stanley Fischer of the International Monetary Fund.
More than 200 people attended the conference, which was cosponsored by The Economist. The conference, broadcast live on the World Wide Web, is available for viewing online along with other Cato programs. Excerpts of remarks from Shelton and Calomiris are available on the November edition of CatoAudio.
This article originally appeared in the January/February 2000 edition of Cato Policy Report.