Global Currency War, Endless Financial Crises: What's Wrong with the International Monetary System?

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Post Event Summary
Since the end of the gold-based fixed exchange rate system in 1971 and the transition to a floating exchange rate system, severe banking and monetary crises have plagued the world almost nonstop. The current post-Bretton Woods system has created some peaceful financial periods, such as the Great Moderation in the United States, but the current account imbalances created by the system are alarming and can be disastrous. Thursday at AEI, a panel of economic experts gathered to discuss the current monetary system and how to improve it.

Robert Aliber from the University of Chicago traced the characteristics of these recurring imbalances that lead to financial shocks and demonstrated that the floating exchange rate system fails to achieve the ends promoted by Milton Friedman and others in the 1960s and '70s. Anne Kruger, former first deputy managing director of the International Monetary Fund, picked up where Aliber's history left off and examined the failures of the multilateral monetary system and the massive capital flow problems created by its perverse incentives. AEI's Desmond Lachman then argued that international participants can choose only two of three options: free trade, free capital flows and floating exchange rates. If all three are employed, the system will suffer crisis-inducing imbalances. AEI's John Makin concluded by pointing out that the system, for all its flaws, is better today than it was in the past, given the level of international cooperation to combat major financial problems, a sharp contrast to Aliber's and Kruger's pessimism.

Event Description
In the aftermath of the Great Recession and the ongoing debt crisis, all countries want cheaper currencies to promote export growth. This has prompted Brazilian Finance Minister Guido Mantega to sound the alarm about the dangers of a global "currency war." The current system of floating fiat currencies, which followed the collapse of the Bretton Woods agreements in 1971, is now four decades old and has been marked by recurring financial crises and extreme exchange rate volatility. The euro is an attempt to go in the opposite direction, with a fixed exchange rate for a large region, but is itself in crisis. Can the current post-Bretton Woods international monetary system prevent a return to the beggar-thy-neighbor policies and competitive devaluations that so harmed international prosperity in the 1930s? What are the system's flaws? Can they be corrected, and if so, how? An expert panel will address these and related issues.

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About the Author

 

John H.
Makin
  • John H. Makin is a resident scholar at the American Enterprise Institute (AEI) where he studies the US economy, monetary policy, financial markets, corporate taxation and banking. He also studies and writes frequently about Japanese, Chinese and European economic issues.

    Makin has served as a consultant to the US Treasury Department, the Congressional Budget Office, and the International Monetary Fund. He spent twenty years on Wall Street as the chief economist, and later as a principal of Caxton Associates a trading and investment firm. Earlier, Makin taught economics at various universities including the University of Virginia. He has also been a scholar at the Bank of Japan, the Federal Reserve Bank of San Francisco, the Federal Bank of Chicago, and the National Bureau of Economic Research. A prolific writer, Makin is the author of numerous books and articles on financial, monetary, and fiscal policy. Makin also writes AEI's monthly Economic Outlook which pairs insightful research with current economic topics.

    Makin received his doctorate and master’s degree in economics from University of Chicago, and bachelor’s degree in economics from Trinity College.


    Follow John Makin on Twitter.

  • Phone: 202-862-5828
    Email: jmakin@aei.org
  • Assistant Info

    Name: Brittany Pineros
    Phone: 202-862-5926
    Email: brittany.pineros@aei.org

 

Desmond
Lachman
  • Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the International Monetary Fund's (IMF) Policy Development and Review Department and was active in staff formulation of IMF policies. Mr. Lachman has written extensively on the global economic crisis, the U.S. housing market bust, the U.S. dollar, and the strains in the euro area. At AEI, Mr. Lachman is focused on the global macroeconomy, global currency issues, and the multilateral lending agencies.
  • Phone: 202-862-5844
    Email: dlachman@aei.org
  • Assistant Info

    Name: Emma Bennett
    Phone: 202.862.5862
    Email: emma.bennett@aei.org

 

Alex J.
Pollock
  • Alex J. Pollock is a resident fellow at the American Enterprise Institute (AEI), where he studies and writes about housing finance; government-sponsored enterprises, including Fannie Mae, Freddie Mac, and the Federal Home Loan Banks; retirement finance; and banking and central banks. He also works on corporate governance and accounting standards issues.


    Pollock has had a 35-year career in banking and was president and CEO of the Federal Home Loan Bank of Chicago for more than 12 years immediately before joining AEI. A prolific writer, he has written numerous articles on financial systems and is the author of the book “Boom and Bust: Financial Cycles and Human Prosperity” (AEI Press, 2011). He has also created a one-page mortgage form to help borrowers understand their mortgage obligations.


    The lead director of CME Group, Pollock is also a director of the Great Lakes Higher Education Corporation and the chairman of the board of the Great Books Foundation. He is a past president of the International Union for Housing Finance.


    He has an M.P.A. in international relations from Princeton University, an M.A. in philosophy from the University of Chicago, and a B.A. from Williams College.


  • Phone: 202.862.7190
    Email: apollock@aei.org
  • Assistant Info

    Name: Emily Rapp
    Phone: (202) 419-5212
    Email: emily.rapp@aei.org

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