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.