The Meltzer plan for world money
The basis for a new monetary order is already here
Professor Allan Meltzer has for some years advocated a reform of international monetary arrangements based on a joint adoption by large economies or areas of similar inflation targets. This is a summary.
The US, the Euro, Japan and China (if it ends its currency controls) should adopt a common 0 to 2 percent inflation rate. Like the gold standard, Meltzer would leave enforcement to the market – no ‘meetings’, please. Unlike the euro, he would permit suspensions.
Following a monetary rule by the 3 or 4 main monetary systems permits other countries to choose to fix their exchange rates. That achieves (for them) the public good of fixed exchange rate and low inflation. The large countries would float to accommodate changes in productivity and possibly tastes. But they would get the benefit of a fixed exchange rate with all countries that chose to peg. And they would have low inflation, thus achieving some public benefit.
If the monetary rule is adopted, it would impose discipline, both monetary and fiscal. For decades the US has continued to run large deficits without being forced by markets to devalue and inflate. My plan would limit, perhaps end, the US’s “special privilege.”
Would this be perfect? No. But it would limit the damage that governments do, particularly the US, and provide a desirable public good that countries could choose. Unlike Bretton Woods, countries that pegged would be responsible for their mistakes or errors. It would be comparable to the gold standard but without gold and without rigidly fixed exchange rates for major currencies. Markets would enforce the equilibrium.
For a fuller account, see “Towards a Global Monetary Policy”, Central Banking, Vol 22, No1, 2011.
