《国际政治经济学》文献资料（Political Economy of Money and Finance：Monetary System and Exchange Rate）Prolegomena to the Choice of an International Monetary System

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Prolegomena to the choice of an international monetary system Richard N.Cooper The international monetary system-the rules and conventions that govern financial relations between countries-is an important component of international relations. When monetary relations go well,other relations have a better chance of going well; when they go badly,other areas are likely to suffer too.Monetary relations have a pervasive influence on both domestic and international economic developments, and history is strewn with examples of monetary failure leading subsequently to economic and political upheaval.Recent years have seen considerable turmoil in international monetary relations,and a marked deterioration in relations between Europe,Japan,and America.Ideally,monetary relations should be inconspicuous, part of the background in a well-functioning system,taken for granted.Once they become visible and uncertain,something is wrong. As a consequence of this recent turmoil,intense official discussions on the nature and the future of the monetary system were belatedly begun in late 1972, under the auspices of the International Monetary Fund (IMF).A year later,little real progress in these discussions could be recorded (official press releases to the contrary notwithstanding).De facto monetary relations between countries were on a radically different course from the official discussions. Many intricate details attend consideration of alternative monetary arrange- ments,and the details are often vitally important.It is not possible,however,to discuss them all in an essay charged with covering a broad spectrum of possible monetary arrangements and the broad implications of alternative monetary arrange- ments for the world as a whole,for groups of particular countries,and for particular groups within countries. This essay has a somewhat more limited purpose.It attempts to survey systematically various possible types of international monetary regimes,to identify criteria for choice between alternative monetary regimes,and to discover the Richard N.Cooper is a professor of economics at Yale University in New Haven,Connecticut. This content downloaded from 211.80.95.69 on Mon,24 Jun 2013 04:23:40 AM All use subject to JSTOR Terms and Conditions

Prolegomena to the choice of an international monetary system Richard N. Cooper The international monetary system-the rules and conventions that govern financial relations between countries-is an important component of international relations. When monetary relations go well, other relations have a better chance of going well; when they go badly, other areas are likely to suffer too. Monetary relations have a pervasive influence on both domestic and international economic developments, and history is strewn with examples of monetary failure leading subsequently to economic and political upheaval. Recent years have seen considerable turmoil in international monetary relations, and a marked deterioration in relations between Europe, Japan, and America. Ideally, monetary relations should be inconspicuous, part of the background in a well-functioning system, taken for granted. Once they become visible and uncertain, something is wrong. As a consequence of this recent turmoil, intense official discussions on the nature and the future of the monetary system were belatedly begun in late 1972, under the auspices of the International Monetary Fund (IMF). A year later, little real progress in these discussions could be recorded (official press releases to the contrary notwithstanding). De facto monetary relations between countries were on a radically different course from the official discussions. Many intricate details attend consideration of alternative monetary arrangements, and the details are often vitally important. It is not possible, however, to discuss them all in an essay charged with covering a broad spectrum of possible monetary arrangements and the broad implications of alternative monetary arrangements for the world as a whole, for groups of particular countries, and for particular groups within countries. This essay has a somewhat more limited purpose. It attempts to survey systematically various possible types of international monetary regimes, to identify criteria for choice between alternative monetary regimes, and to discover the Richard N. Cooper is a professor of economics at Yale University in New Haven, Connecticut. This content downloaded from 211.80.95.69 on Mon, 24 Jun 2013 04:23:40 AM All use subject to JSTOR Terms and Conditions

64 International Organization reasons for disagreement between nations and between groups within nations on the choice of an international monetary regime.It draws on recent monetary history and on current discussions of reform of the monetary system for illustra- tions,and tries to suggest why cost-benefit analysis,while an appropriate frame- work in principle,is in practice so difficult to execute in this area.If the essay carries any principal message,it is that sources of disagreement do not generally derive from divergent interests,but rather from diverse perspectives and hence different conjectures about the consequences of one regime as compared with another.In short,disagreement arises mainly from ignorance about the true effects, so that we must use reasoned conjecture rather than solid fact to guide our choices, and reasonable people may and do differ with respect to their conjectures.The essay concludes with some brief observations on the appropriate role of interna- tional organizations in the international monetary arena and on the broad direc- tions I believe the international monetary system should take. I define a regime as any particular set of rules or conventions governing monetary and financial relations between countries.Regime seems preferable to system or order,both of which are sometimes used in this context,since it encompasses arrangements that are neither orderly nor systematic.A monetary regime specifies which instruments of policy may be used and which targets of policy are regarded as legitimate,including of course the limiting cases in which there are no restrictions on either.I propose here to outline a number of international monetary regimes in terms of their major features,and to offer some brief comments on their costs and benefits.Each regime has many variants,variants that may either aggravate or mitigate the disadvantages,so that the distinctions between them are not in fact as sharp as I sometimes make it appear.Moreover, each regime may operate in many different ways,and a given regime may either be resoundingly successful or totally stymied,depending on how the participants operate within it.Some regimes lack the technical requisites for success and are bound to fail;others,internally consistent,can work effectively in one political milieu but not in another.Students of international relations too often focus on the political milieu to the neglect of requirements of internal consistency and technical proficiency;economists are prone to the opposite error. One possible regime would be to have no rules or conventions at all-to allow each country to do what it thinks best,without any form of coordination.This may be called a free-for-all regime,with the understanding that in international monetary affairs governments and central banks are principal actors,so that the term free-for-all refers primarily to their actions,not merely to those of private 1A particularly poignant example of the severe limits a given regime can impose on the use of instruments of policy,and of the psychological hold a regime of long standing can have on even well-informed observers,is the surprised anguish of Fabian socialist Sidney Webb when,in 1931,in the face of enormous unemployment,Britain abandoned the fixed price of gold and allowed the pound to float:"No one told us we could do this."(A.J.P.Taylor,English History,1914-1945 [New York:Oxford University Press,1965]p.297,cited in Fred Hirsch, Money International [Garden City,N.Y.:Doubleday,1969],p.4.) This content downloaded from 211.80.95.69 on Mon,24 Jun 201304:23:40 AM All use subject to JSTOR Terms and Conditions

64 International Organization reasons for disagreement between nations and between groups within nations on the choice of an international monetary regime. It draws on recent monetary history and on current discussions of reform of the monetary system for illustrations, and tries to suggest why cost-benefit analysis, while an appropriate framework in principle, is in practice so difficult to execute in this area. If the essay carries any principal message, it is that sources of disagreement do not generally derive from divergent interests, but rather from diverse perspectives and hence different conjectures about the consequences of one regime as compared with another. In short, disagreement arises mainly from ignorance about the true effects, so that we must use reasoned conjecture rather than solid fact to guide our choices, and reasonable people may and do differ with respect to their conjectures. The essay concludes with some brief observations on the appropriate role of international organizations in the international monetary arena and on the broad directions I believe the international monetary system should take. I define a regime as any particular set of rules or conventions governing monetary and financial relations between countries. Regime seems preferable to system or order, both of which are sometimes used in this context, since it encompasses arrangements that are neither orderly nor systematic. A monetary regime specifies which instruments of policy may be used and which targets of policy are regarded as legitimate, including of course the limiting cases in which there are no restrictions on either.' I propose here to outline a number of international monetary regimes in terms of their major features, and to offer some brief comments on their costs and benefits. Each regime has many variants, variants that may either aggravate or mitigate the disadvantages, so that the distinctions between them are not in fact as sharp as I sometimes make it appear. Moreover, each regime may operate in many different ways, and a given regime may either be resoundingly successful or totally stymied, depending on how the participants operate within it. Some regimes lack the technical requisites for success and are bound to fail; others, internally consistent, can work effectively in one political milieu but not in another. Students of international relations too often focus on the political milieu to the neglect of requirements of internal consistency and technical proficiency; economists are prone to the opposite error. One possible regime would be to have no rules or conventions at all-to allow each country to do what it thinks best, without any form of coordination. This may be called a free-for-all regime, with the understanding that in international monetary affairs governments and central banks are principal actors, so that the term free-for-all refers primarily to their actions, not merely to those of private I A particularly poignant example of the severe limits a given regime can impose on the use of instruments of policy, and of the psychological hold a regime of long standing can have on even well-informed observers, is the surprised anguish of Fabian socialist Sidney Webb when, in 1931, in the face of enormous unemployment, Britain abandoned the fixed price of gold and allowed the pound to float: "No one told us we could do this." (A. J. P. Taylor, English History, 1914-1 945 [New York: Oxford University Press, 1965] p. 297, cited in Fred Hirsch, Money International [Garden City, N.Y.: Doubleday, 1969], p. 4.) This content downloaded from 211.80.95.69 on Mon, 24 Jun 2013 04:23:40 AM All use subject to JSTOR Terms and Conditions

Choice of a monetary system 65 transactors.In contrast,a regime of freely floating exchange rates and no controls on private international transactions,that is,a regime in which governments agree not to interfere either with transactions or with the foreign exchange market in any way,is definitely not a system without rules;indeed,it involves extraordinarily stringent proscriptions. A free-for-all regime does not commend itself.It would allow large nations to try to exploit their power at the expense of smaller nations.It would give rise to attempts by individual nations to pursue objectives that were not consistent with one another (e.g.,inconsistent aims with regard to a single exchange rate between two currencies),with resulting disorganization of markets.Even if things finally settled down,the pattern would very likely be far from optimal from the viewpoint of all the participants. A well-analyzed sequence from the realm of trade policy that encompasses all three of these disadvantages illustrates the possibilities.A large nation attempts to exploit its monopolistic position at the expense of other nations by imposing an optimum tariff.Other things being equal,it can gain by imposition of a tariff,the appropriate size of which depends on the monopoly position of the country.But other things do not generally remain equal,for other countries can also gain through the imposition of tariffs.Such retaliation creates a new situation for the first country,which should then alter its tariff,perhaps by raising it,to exploit fully its monopoly position.And so the tariff war goes,creating much turmoil with trade during the process,until a point is reached at which no country can gain further through unilateral action.Furthermore,the resulting pattern of tariffs will almost certainly leave all countries worse off than they would have been if the first country had not attempted to exploit its advantage.2 A regime that prohibits or limits tariff warfare would be mutually beneficial. Similar examples can be found in the monetary realm.For instance,a general shortage of liquidity under a gold standard regime might lead various countries to devalue their currencies in terms of gold in order to improve their payments positions for the purpose of adding to their stocks of money.This behavior would lead to competitive depreciation all around,with an ultimate write-up in the value of gold in terms of all currencies and possibly some stimulation of new gold production,but only after a painful and acrimonious transition.It would be far better to agree together on a"uniform change in par values"(in the language of the Bretton Woods Agreement)of currencies against gold,thus avoiding the needless change in relative currency values and the disruptions to national economies that would obtain under the hypothesized circumstances.It would be better still to abandon reliance on a commodity in short supply and create,by agreement,some 2Harry G.Johnson has pointed out that in the final equilibrium it is possible for one country to be left better off than in the free trade situation;but both countries taken together will certainly be worse off,and I judge that in most circumstances each country taken separately would be left worse off.See his "Optimum Tariffs and Retaliation,"in his International Trade and Economic Growth:Studies in Pure Theory (Cambridge,Mass.:Harvard University Press, 1967). This content downloaded from 211.80.95.69 on Mon,24 Jun 2013 04:23:40 AM All use subject to JSTOR Terms and Conditions

Choice of a monetary system 65 transactors. In contrast, a regime of freely floating exchange rates and no controls on private international transactions, that is, a regime in which governments agree not to interfere either with transactions or with the foreign exchange market in any way, is definitely not a system without rules; indeed, it involves extraordinarily stringent proscriptions. A free-for-all regime does not commend itself. It would allow large nations to try to exploit their power at the expense of smaller nations. It would give rise to attempts by individual nations to pursue objectives that were not consistent with one another (e.g., inconsistent aims with regard to a single exchange rate between two currencies), with resulting disorganization of markets. Even if things finally settled down, the pattern would very likely be far from optimal from the viewpoint of all the participants. A well-analyzed sequence from the realm of trade policy that encompasses all three of these disadvantages illustrates the possibilities. A large nation attempts to exploit its monopolistic position at the expense of other nations by imposing an optimum tariff. Other things being equal, it can gain by imposition of a tariff, the appropriate size of which depends on the monopoly position of the country. But other things do not generally remain equal, for other countries can also gain through the imposition of tariffs. Such retaliation creates a new situation for the first country, which should then alter its tariff, perhaps by raising it, to exploit fully its monopoly position. And so the tariff war goes, creating much turmoil with trade during the process, until a point is reached at which no country can gain further through unilateral action. Furthermore, the resulting pattern of tariffs will almost certainly leave all countries worse off than they would have been if the first country had not attempted to exploit its advantage.2 A regime that prohibits or limits tariff warfare would be mutually beneficial. Similar examples can be found in the monetary realm. For instance, a general shortage of liquidity under a gold standard regime might lead various countries to devalue their currencies in terms of gold in order to improve their payments positions for the purpose of adding to their stocks of money. This behavior would lead to competitive depreciation all around, with an ultimate write-up in the value of gold in terms of all currencies and possibly some stimulation of new gold production, but only after a painful and acrimonious transition. It would be far better to agree together on a "uniform change in par values" (in the language of the Bretton Woods Agreement) of currencies against gold, thus avoiding the needless change in relative currency values and the disruptions to national economies that would obtain under the hypothesized circumstances. It would be better still to abandon reliance on a commodity in short supply and create, by agreement, some 2Harry G. Johnson has pointed out that in the final equilibrium it is possible for one country to be left better off than in the free trade situation; but both countries taken together will certainly be worse off, and I judge that in most circumstances each country taken separately would be left worse off. See his "Optimum Tariffs and Retaliation," in his International Trade and Economic Growth: Studies in Pure Theory (Cambridge, Mass.: Harvard University Press, 1967). This content downloaded from 211.80.95.69 on Mon, 24 Jun 2013 04:23:40 AM All use subject to JSTOR Terms and Conditions

66 International Organization form of fiduciary asset,such as domestic paper money within economies and special drawing rights at the international level. Moreover,a free-for-all regime ignores the vital point that money,including international money,is a social convention,a collective human contrivance of the highest order.One after another during the nineteenth and early twentieth cen- turies,nations evolved domestic monies and then endowed them with legal tender status.At the international level,some kind of international money has also evolved.First came the commodity monies,silver and gold,then the national monies,sterling and the dollar.All served better than nothing but all fell short of an optimal solution.International agreement is required to do better. Types of international monetary regimes Perceiving that some form of order is necessary does not determine what kind of order.Many are possible,indeed,too many to discuss comprehensively.I thus confine the following discussion to three broad features,or dimensions,of a monetary regime,and to various possible stopping points along each dimension. The choice of these particular dimensions among many is influenced by the fact that they are the most prominent in current discussions of reform of the monetary system.The dimensions are (1)the role of exchange rates,(2)the nature of the reserve asset(s),and(3)the degree of control of international capital movements. These features can be viewed as varying along a continuum,but for purposes of discussion it is perhaps more useful to specify particular points in each of these dimensions.Thus table 1 sets out an array of possible monetary regimes,drawing one element from each of the columns.Logically there would be 45 regimes (5x3x3)on the basis of the elements in table 1,but freely floating exchange rates strictly would require no reserve asset,so that in fact only 39 different regimes are described there-still too many to discuss comfortably,even before allowing for the many variants of each. The textbook gold standard,which still provides the historical basis for comparison in many discussions of the international monetary systems,is entry I.A.1.in table 1:fixed exchange rates(except for modest variation within the gold points),gold reserves,and full freedom of capital movements.The original Bretton Woods system is entry II.A.3.in table 1,although the requirement that capital movements be controlled was implicit rather than explicit in that agreement. During the 1950s and again since 1970,Canada adopted the system IV.C.1.,that is, a regime of managed flexibility in exchange rates and reliance on the United States dollar as its principal reserve asset. The last example illustrates the important point that not all countries need abide by the same conventions within a given international monetary regime.Thus the European Community countries have set themselves the objective of adopting I.D.1.(where D stands for the as yet undetermined new European reserve asset), This content downloaded from 211.80.95.69 on Mon,24 Jun 2013 04:23:40 AM All use subject to JSTOR Terms and Conditions

66 International Organization form of fiduciary asset, such as domestic paper money within economies and special drawing rights at the international level. Moreover, a free-for-all regime ignores the vital point that money, including international money, is a social convention, a collective human contrivance of the highest order. One after another during the nineteenth and early twentieth centuries, nations evolved domestic monies and then endowed them with legal tender status. At the international level, some kind of international money has also evolved. First came the commodity monies, silver and gold, then the national monies, sterling and the dollar. All served better than nothing but all fell short of an optimal solution. International agreement is required to do better. Types of international monetary regimes Perceiving that some form of order is necessary does not determine what kind of order. Many are possible, indeed, too many to discuss comprehensively. I thus confine the following discussion to three broad features, or dimensions, of a monetary regime, and to various possible stopping points along each dimension. The choice of these particular dimensions among many is influenced by the fact that they are the most prominent in current discussions of reform of the monetary system. The dimensions are (1) the role of exchange rates, (2) the nature of the reserve asset(s), and (3) the degree of control of international capital movements. These features can be viewed as varying along a continuum, but for purposes of discussion it is perhaps more useful to specify particular points in each of these dimensions. Thus table 1 sets out an array of possible monetary regimes, drawing one element from each of the columns. Logically there would be 45 regimes (5x3x3) on the basis of the elements in table 1, but freely floating exchange rates strictly would require no reserve asset, so that in fact only 39 different regimes are described there-still too many to discuss comfortably, even before allowing for the many variants of each. The textbook gold standard, which still provides the historical basis for comparison in many discussions of the international monetary systems, is entry I.A. 1. in table 1: fixed exchange rates (except for modest variation within the gold points), gold reserves, and full freedom of capital movements. The original Bretton Woods system is entry II.A.3. in table 1, although the requirement that capital movements be controlled was implicit rather than explicit in that agreement. During the 1950s and again since 1970, Canada adopted the system IV.C.1., that is, a regime of managed flexibility in exchange rates and reliance on the United States dollar as its principal reserve asset. The last example illustrates the important point that not all countries need abide by the same conventions within a given international monetary regime. Thus the European Community countries have set themselves the objective of adopting I.D. 1. (where D stands for the as yet undetermined new European reserve asset), This content downloaded from 211.80.95.69 on Mon, 24 Jun 2013 04:23:40 AM All use subject to JSTOR Terms and Conditions

Choice of a monetary system 67 Table 1.Several possible international monetary regimes (choose one from each column) Role of exchange rates Degree of market in balance-of-payments convertibility for adjustment Reserve asset capital movements I.Fixed exchange rate A.Gold 1.Full II.Adjustable parities B. SDRs* 2.Dual market III.Gliding parities C.US dollars 3.Controlled and other IV.Managed float national currencies V.Free float *Refers to special drawing rights,first created in 1970 by the International Monetary Fund. regardless of the practices that obtain in the rest of the world.Many small countries may prefer II.C.1.with respect to a"mother country"(e.g.,the Sterling Area)even though large countries are on a different regime.But to function,the mixed international regime must still meet certain consistency requirements:the different components must be compatible with one another. Just specifying a regime in these gross dimensions does not indicate how well it will work.That depends,among other things,on how countries behave within the rules and conventions of a particular regime,not merely on the choice of regime. This fact greatly complicates the choice of a regime,since how countries will behave once it is adopted cannot be forecast with certainty.However,some regimes do have technical weaknesses as compared with others.An adjustable peg regime with uncontrolled capital movements will evoke large movements of funds when- ever a change in exchange rates is in prospect,for example,and a gold standard requires balance-of-payments adjustment to take place through variations in domes- tic employment.To point to these difficulties shifts the discussion from possible regimes to the desirability of alternative regimes. Criteria for choosing a monetary regime Choice between alternative regimes requires a specification of objectives,with relative weights to indicate which ones must govern when a conflict arises between This content downloaded from 211.80.95.69 on Mon,24 Jun 201304:23:40 AM All use subject to JSTOR Terms and Conditions

Choice of a monetary system 67 Table 1. Several possible international monetary regimes (choose one from each column) Role of exchange rates Degree of market in balance-of-payments convertibility for adjustment Reserve asset capital movements I. Fixed exchange rate A. Gold 1. Full II. Adjustable parities B. SDRs* 2. Dual market III. Gliding parities C. US dollars 3. Controlled and other IV. Managed float national currencies V. Free float *Refers to special drawing rights, first created in 1970 by the International Monetary Fund. regardless of the practices that obtain in the rest of the world. Many small countries may prefer II.C.1. with respect to a "mother country" (e.g., the Sterling Area) even though large countries are on a different regime. But to function, the mixed international regime must still meet certain consistency requirements: the different components must be compatible with one another. Just specifying a regime in these gross dimensions does not indicate how well it will work. That depends, among other things, on how countries behave within the rules and conventions of a particular regime, not merely on the choice of regime. This fact greatly complicates the choice of a regime, since how countries will behave once it is adopted cannot be forecast with certainty. However, some regimes do have technical weaknesses as compared with others. An adjustable peg regime with uncontrolled capital movements will evoke large movements of funds whenever a change in exchange rates is in prospect, for example, and a gold standard requires balance-of-payments adjustment to take place through variations in domestic employment. To point to these difficulties shifts the discussion from possible regimes to the desirability of alternative regimes. Criteria for choosing a monetary regime Choice between alternative regimes requires a specification of objectives, with relative weights to indicate which ones must govern when a conflict arises between This content downloaded from 211.80.95.69 on Mon, 24 Jun 2013 04:23:40 AM All use subject to JSTOR Terms and Conditions

68 International Organization them.It is the liberal Western tradition to place as the ultimate objective the well-being of individual members of society (rather than the power of the state,the wealth of the ruling autocracy,etc.).Individual well-being has both an economic dimension,taken in its broadest terms,and a security dimension,also taken in its broadest terms.The first involves the economic capacity of an individual to pursue his own aims,and the second involves his liberty to do so without unnecessary interference from the state or from other individuals. At this high level of generalization,there is little dispute between major participating countries over objectives of the international monetary system or over any other set of conventions governing relations among nations or men.Disputes, rather,arise over the best way to obtain these objectives,over means rather than over ends.It is nonetheless useful to state the ultimate objectives from time to time,for it frequently happens that means become proximate ends,and in the pursuit of these proximate or intermediate objectives in ever greater technical detail,actors may lose sight of the ultimate objectives and even compromise them for the sake of achieving some instrumental objective.Restrictive balance-of-pay- ments measures by all major nations during the 1960s illustrate the point all too vividly. By what criteria should we judge an international monetary system,having in mind its ultimate purpose of improving the economic well-being and the security of mankind?Four come to mind:(1)economic efficiency,(2)its scope for accom- modating local diversity in objectives,(3)its contribution to harmony in interna- tional relations beyond monetary relations,and(4)its ability to achieve a desired distribution of the gains,both between countries and within countries,that arise from one regime over another.Economists have tended to focus their attention on the first of these criteria,with some attention to the second and the fourth.They have also devoted considerable attention to the technical workability of the numerous variants of alternative regimes. Economic efficiency concerns the effectiveness with which we use the world's limited natural and human resources to make possible the improvement of eco- nomic well-being.The single most frequently used measure is per capita national product,although economists recognize that the figures they actually use to represent this concept can be misleading if not appropriately interpreted.In the context of international monetary reform,economic efficiency has been considered under three broad categories:(1)macroeconomic management,or the degree to which the international monetary system facilities or impedes the full employment of resources and the attainment of price stability;(2)microeconomic efficiency in the use of resources,especially as it is influenced by exchange rates as prices that guide the allocation of resources;and (3)microeconomic efficiency in the use of money as a lubricant for efficient resource allocation.The last of these categories has received the least systematic attention(partly because it cannot now be handled by conventional economic theory)yet,as I discuss below,represents an important area of reservation about a regime of flexible exchange rates. This content downloaded from 211.80.95.69 on Mon,24 Jun 2013 04:23:40 AM All use subject to JSTOR Terms and Conditions

68 International Organization them. It is the liberal Western tradition to place as the ultimate objective the well-being of individual members of society (rather than the power of the state, the wealth of the ruling autocracy, etc.). Individual well-being has both an economic dimension, taken in its broadest terms, and a security dimension, also taken in its broadest terms. The first involves the economic capacity of an individual to pursue his own aims, and the second involves his liberty to do so without unnecessary interference from the state or from other individuals. At this high level of generalization, there is little dispute between major participating countries over objectives of the international monetary system or over any other set of conventions governing relations among nations or men. Disputes, rather, arise over the best way to obtain these objectives, over means rather than over ends. It is nonetheless useful to state the ultimate objectives from time to time, for it frequently happens that means become proximate ends, and in the pursuit of these proximate or intermediate objectives in ever greater technical detail, actors may lose sight of the ultimate objectives and even compromise them for the sake of achieving some instrumental objective. Restrictive balance-of-payments measures by all major nations during the 1960s illustrate the point all too vividly. By what criteria should we judge an international monetary system, having in mind its ultimate purpose of improving the economic well-being and the security of mankind? Four come to mind: (1) economic efficiency, (2) its scope for accommodating local diversity in objectives, (3) its contribution to harmony in international relations beyond monetary relations, and (4) its ability to achieve a desired distribution of the gains, both between countries and within countries, that arise from one regime over another. Economists have tended to focus their attention on the first of these criteria, with some attention to the second and the fourth. They have also devoted considerable attention to the technical workability of the numerous variants of alternative regimes. Economic efficiency concerns the effectiveness with which we use the world's limited natural and human resources to make possible the improvement of economic well-being. The single most frequently used measure is per capita national product, although economists recognize that the figures they actually use to represent this concept can be misleading if not appropriately interpreted. In the context of international monetary reform, economic efficiency has been considered under three broad categories: (1) macroeconomic management, or the degree to which the international monetary system facilities or impedes the full employment of resources and the attainment of price stability; (2) microeconomic efficiency in the use of resources, especially as it is influenced by exchange rates as prices that guide the allocation of resources; and (3) microeconomic efficiency in the use of money as a lubricant for efficient resource allocation. The last of these categories has received the least systematic attention (partly because it cannot now be handled by conventional economic theory) yet, as I discuss below, represents an important area of reservation about a regime of flexible exchange rates. This content downloaded from 211.80.95.69 on Mon, 24 Jun 2013 04:23:40 AM All use subject to JSTOR Terms and Conditions

Choice of a monetary system 69 Controversy over the choice of a monetary regime Simply stating the criteria by which alternative international monetary re- gimes should be judged is not the same as determining which one dominates the others,even if the criteria could be fully quantified.Controversy over the choice of an international monetary regime arises in five separately identifiable categories: (1)understandably different preferences over the different distributional implica- tions,actual or perceived,of alternative regimes,(2)different weights attached to the various criteria when compromises must be made between them,(3)different national economic circumstances,even when preferences regarding the criteria are similar,(4)disagreement over the effectiveness of alternative means to achieve agreed ends,and (5)uncertainty about the trustworthiness of other countries with regard to their behavior within any chosen regime.Each of these sources of controversy deserves extended comment,but it is only possible to touch on them lightly here. Distribution Disagreements arising from different distributional implications are perhaps the most straightforward source of controversy,although even here there is much disagreement about what actually are the distributional implications of alternative regimes.Several kinds of gain arising from alternative monetary regimes can be identified. First,there is the question of seigniorage.Traditionally,seigniorage is the gain that accrues to the mint arising from any difference between the commodity value of the materials going into a coin and the monetary value of the minted coin. Strictly speaking,seigniorage is the difference net of the costs of minting,and under a competitive regime of free access to the mint seigniorage will be zero.In the course of time,governments asserted a monopoly over the power to coin money and restricted coinage,and seigniorage-in effect,monopoly rents-accrued to national governments. By analogy,we can ask what happens to the seigniorage,if any,arising from the use of a particular reserve asset under alternative international monetary regimes.3 The seigniorage under a gold standard regime accrues to the owners of gold mines,in the form of greater intramarginal rents on the production of gold than would be the case in the absence of monetary demand for that metal.Not surprisingly,among nations the Union of South Africa and the Soviet Union have been the two most consistent supporters of returning to gold as the principal international reserve asset;these two countries are the first and second largest Herbert G.Grubel."The Distribution of Seigniorage from International Liquidity Creation," and Harry G.Johnson,"A Note on Seigniorage and the Social Saving from Substituting Credit for Commodity Money,"in R.A.Mundell and A.K.Swoboda,eds.,Monetary Problems of the International Economy (Chicago:University of Chicago Press,1969),pp.269-82,323-29. This content downloaded from 211.80.95.69 on Mon,24 Jun 2013 04:23:40 AM All use subject to JSTOR Terms and Conditions

Choice of a monetary system 69 Controversy over the choice of a monetary regime Simply stating the criteria by which alternative international monetary regimes should be judged is not the same as determining which one dominates the others, even if the criteria could be fully quantified. Controversy over the choice of an international monetary regime arises in five separately identifiable categories: (1) understandably different preferences over the different distributional implications, actual or perceived, of alternative regimes, (2) different weights attached to the various criteria when compromises must be made between them, (3) different national economic circumstances, even when preferences regarding the criteria are similar, (4) disagreement over the effectiveness of alternative means to achieve agreed ends, and (5) uncertainty about the trustworthiness of other countries with regard to their behavior within any chosen regime. Each of these sources of controversy deserves extended comment, but it is only possible to touch on them lightly here. Distribution Disagreements arising from different distributional implications are perhaps the most straightforward source of controversy, although even here there is much disagreement about what actually are the distributional implications of alternative regimes. Several kinds of gain arising from alternative monetary regimes can be identified. First, there is the question of seigniorage. Traditionally, seigniorage is the gain that accrues to the mint arising from any difference between the commodity value of the materials going into a coin and the monetary value of the minted coin. Strictly speaking, seigniorage is the difference net of the costs of minting, and under a competitive regime of free access to the mint seigniorage will be zero. In the course of time, governments asserted a monopoly over the power to coin money and restricted coinage, and seigniorage-in effect, monopoly rents-accrued to national governments. By analogy, we can ask what happens to the seigniorage, if any, arising from the use of a particular reserve asset under alternative international monetary regimes.3 The seigniorage under a gold standard regime accrues to the owners of gold mines, in the form of greater intramarginal rents on the production of gold than would be the case in the absence of monetary demand for that metal. Not surprisingly, among nations the Union of South Africa and the Soviet Union have been the two most consistent supporters of returning to gold as the principal international reserve asset; these two countries are the first and second largest 'Herbert G. Grubel. "The Distribution of Seigniorage from International Liquidity Creation," and Harry G. Johnson, "A Note on Seigniorage and the Social Saving from Substituting Credit for Commodity Money," in R. A. Mundell and A. K. Swoboda, eds., Monetary Problems of the International Economy (Chicago: University of Chicago Press, 1969), pp. 269-82, 323-29. This content downloaded from 211.80.95.69 on Mon, 24 Jun 2013 04:23:40 AM All use subject to JSTOR Terms and Conditions

70 International Organization producers of gold in the world,and stand to gain the most in seigniorage from reliance on gold. The seigniorage question has recently been raised in connection with the use of national currencies,mainly the US dollar,as international reserve assets.It has been alleged that the United States gains substantial seigniorage by virtue of international use of the dollar,and that this particular distribution of the gains from a monetary system to the world's richest country is perverse. The debate is too complicated to explore thoroughly here,but the presence of seigniorage in this case is not in fact self-evident.It is undeniably true that international use of the dollar is a convenience to the American traveler,who does not always have to buy foreign money because his dollars are widely acceptable.In that respect,international use of a national currency is like international use of a national language:it confers benefits of convenience on the residents of the home country.But that is not seigniorage.And in any case,utilitarian calculation would suggest that international use of both the dollar and of English as the money and the language of convenience is optimal,since Americans represent by far the largest group of world travelers.(Where,as in southern Europe,Germans or others are the dominant group,their currency is similarly usable.) Foreign holdings of US currency notes represent an inconsequential portion of foreign dollar holdings.Most official dollar holdings,those that constitute international reserves,are held as interest-bearing securities,such as Treasury bills and certificates of deposit.To the extent that the markets in these securities are competitive,and in fact financial markets for large transactors are among the most competitive markets anywhere,no seigniorage exists,i.e.,no special gains arise from a privilege of currency issue.The gains from financial specialization are of course present,but they are diffused widely to all users of the financial system,foreign as well as domestic,partly in the form of interest payments.It simply represents another form of international specialization,such as that associated with com- modity trade,leading to mutual gain.This is true even when it is observed that overall the United States has borrowed short and lent long,earning the difference in yield between short-term and long-term assets.Under competitive conditions,this difference merely represents the costs and risks associated with financial inter- mediation;again no special gain arises,and again it represents just another form of mutually beneficial specialization.4 Finally,it has been suggested that the United States has reaped a special gain by "borrowing"extensively abroad (international use of the dollar,looked at from the other side of the transaction,represents borrowing by the United States from the rest of the world,just as a checking account represents borrowing by the bank 4These arguments require some qualification.If competitive banks are subject to non-interest- bearing reserve requirements,as they are in the United States,then the interest rate on their certificates of deposit will be correspondingly reduced,and some seignorage does arise. Furthermore,from 1963 to 1974,the United States imposed taxes (the Interest Equalization Tax)and other restrictions on capital outflow from the United States,with the encouragement and approval of many European countries,and such restrictions on financial intermediation would again give rise to some seigniorage. This content downloaded from 211.80.95.69 on Mon,24 Jun 201304:23:40 AM All use subject to JSTOR Terms and Conditions

70 International Organization producers of gold in the world, and stand to gain the most in seigniorage from reliance on gold. The seigniorage question has recently been raised in connection with the use of national currencies, mainly the US dollar, as international reserve assets. It has been alleged that the United States gains substantial seigniorage by virtue of international use of the dollar, and that this particular distribution of the gains from a monetary system to the world's richest country is perverse. The debate is too complicated to explore thoroughly here, but the presence of seigniorage in this case is not in fact self-evident. It is undeniably true that international use of the dollar is a convenience to the American traveler, who does not always have to buy foreign money because his dollars are widely acceptable. In that respect, international use of a national currency is like international use of a national language: it confers benefits of convenience on the residents of the home country. But that is not seigniorage. And in any case, utilitarian calculation would suggest that international use of both the dollar and of English as the money and the language of convenience is optimal, since Americans represent by far the largest group of world travelers. (Where, as in southern Europe, Germans or others are the dominant group, their currency is similarly usable.) Foreign holdings of US currency notes represent an inconsequential portion of foreign dollar holdings. Most official dollar holdings, those that constitute international reserves, are held as interest-bearing securities, such as Treasury bills and certificates of deposit. To the extent that the markets in these securities are competitive, and in fact financial markets for large transactors are among the most competitive markets anywhere, no seigniorage exists, i.e., no special gains arise from a privilege of currency issue. The gains from financial specialization are of course present, but they are diffused widely to all users of the financial system, foreign as well as domestic, partly in the form of interest payments. It simply represents another form of international specialization, such as that associated with commodity trade, leading to mutual gain. This is true even when it is observed that overall the United States has borrowed short and lent long, earning the difference in yield between short-term and long-term assets. Under competitive conditions, this difference merely represents the costs and risks associated with financial intermediation; again no special gain arises, and again it represents just another form of mutually beneficial specialization.4 Finally, it has been suggested that the United States has reaped a special gain by "borrowing" extensively abroad (international use of the dollar, looked at from the other side of the transaction, represents borrowing by the United States from the rest of the world, just as a checking account represents borrowing by the bank 4These arguments require some qualification. If competitive banks are subject to non-interestbearing reserve requirements, as they are in the United States, then the interest rate on their certificates of deposit will be correspondingly reduced, and some seignorage does arise. Furthermore, from 1963 to 1974, the United States imposed taxes (the Interest Equalization Tax) and other restrictions on capital outflow from the United States, with the encouragement and approval of many European countries, and such restrictions on financial intermediation would again give rise to some seigniorage. This content downloaded from 211.80.95.69 on Mon, 24 Jun 2013 04:23:40 AM All use subject to JSTOR Terms and Conditions

Choice of a monetary system 71 from the depositor)and then depreciating the real value of its extensive debt by generating inflation.Thus the United States can allegedly impose an inflation tax on the rest of the world.But this assertion presupposes that interest rates do not adjust fully to compensate for the expected rate of inflation.The fact that US Treasury bill rates carried an average yield of 7.02 percent in 1973 compared with only 3.95 percent in 1965,both boom years,is surely explainable largely by an expectation in the latter period of more rapid inflation.If the adjustment in interest rates is complete,the inflation tax can be levied only on non-interest- bearing dollar assets,of which central banks hold relatively little.A gain of course can arise during a period of changing expectations when interest rates have not adjusted fully to the new situation,and during such a period this version of the seigniorage argument has some merit.But otherwise it is not compelling. The seigniorage question arises most explicitly in a regime with an inter- national fiduciary asset such as the IMF's special drawing rights(SDRs),for they represent a form of costless money that carries purchasing power.How they are allocated seems to confer real benefits directly on the recipients,and the complaint has been voiced that allocation according to the present IMF quotas,over 70 percent of which are assigned to the industrial countries,represents an undesirable and even an unfair system of distribution.The issue has been brought forward in current discussions of international monetary reform as a proposal to link SDR creation and development assistance by shifting the allocation of new SDRs heavily toward the less developed countries.Indeed,the latter countries as a group have all but made some movement in this direction a precondition for their approval of any monetary reform.(Again the issues are too complicated to be discussed fully here.5) Many observers fear that such a link would undermine the success of the SDR as a reserve asset,and thereby nullify its principal purpose,which most countries,at least at the level of rhetoric,purport to share,for the sake of a secondary distributional objective.Moreover,even the issue of whether there is true seignio- rage here at least requires some further analysis,since the IMF quota formula for allocating SDRs purports to measure,with admitted imperfection,the liquidity needs of different nations;to the extent that it does so accurately,allocation of SDRs results in no net transfer of resources over time,and thus in no real seigniorage (i.e.,no greater consumption or investment than otherwise). Seigniorage as a source of distributional gain has drawn the greatest attention from economists,although in practice it is perhaps the least important of the distributional effects.Several other distributional effects arising from a reserve currency standard based on some national currency (formerly the pound sterling, more recently the dollar)can be mentioned.First,it has been claimed that the dollar exchange standard gave the United States much wider scope to pursue its preferred domestic economic and other policies,even its foreign policies,than was available to other countries.The United States could simply cover any resultant sFor a convenient summary of the debate,with extensive references to the literature,see Y. S.Park,The Link Between Special Drawing Rights and Development Finance,Essays in International Finance,no.100(Princeton,N.J.:Princeton University,September 1973). This content downloaded from 211.80.95.69 on Mon,24 Jun 201304:23:40 AM All use subject to JSTOR Terms and Conditions

Choice of a monetary system 71 from the depositor) and then depreciating the real value of its extensive debt by generating inflation. Thus the United States can allegedly impose an inflation tax on the rest of the world. But this assertion presupposes that interest rates do not adjust fully to compensate for the expected rate of inflation. The fact that US Treasury bill rates carried an average yield of 7.02 percent in 1973 compared with only 3.95 percent in 1965, both boom years, is surely explainable largely by an expectation in the latter period of more rapid inflation. If the adjustment in interest rates is complete, the inflation tax can be levied only on non-interestbearing dollar assets, of which central banks hold relatively little. A gain of course can arise during a period of changing expectations when interest rates have not adjusted fully to the new situation, and during such a period this version of the seigniorage argument has some merit. But otherwise it is not compelling. The seigniorage question arises most explicitly in a regime with an international fiduciary asset such as the IMF's special drawing rights (SDRs), for they represent a form of costless money that carries purchasing power. How they are allocated seems to confer real benefits directly on the recipients, and the complaint has been voiced that allocation according to the present IMF quotas, over 70 percent of which are assigned to the industrial countries, represents an undesirable and even an unfair system of distribution. The issue has been brought forward in current discussions of international monetary reform as a proposal to link SDR creation and development assistance by shifting the allocation of new SDRs heavily toward the less developed countries. Indeed, the latter countries as a group have all but made some movement in this direction a precondition for their approval of any monetary reform. (Again the issues are too complicated to be discussed fully here.5) Many observers fear that such a link would undermine the success of the SDR as a reserve asset, and thereby nullify its principal purpose, which most countries, at least at the level of rhetoric, purport to share, for the sake of a secondary distributional objective. Moreover, even the issue of whether there is true seigniorage here at least requires some further analysis, since the IMF quota formula for allocating SDRs purports to measure, with admitted imperfection, the liquidity needs of different nations; to the extent that it does so accurately, allocation of SDRs results in no net transfer of resources over time, and thus in no real seigniorage (i.e., no greater consumption or investment than otherwise). Seigniorage as a source of distributional gain has drawn the greatest attention from economists, although in practice it is perhaps the least important of the distributional effects. Several other distributional effects arising from a reserve currency standard based on some national currency (formerly the pound sterling, more recently the dollar) can be mentioned. First, it has been claimed that the dollar exchange standard gave the United States much wider scope to pursue its preferred domestic economic and other policies, even its foreign policies, than was available to other countries. The United States could simply cover any resultant 'For a convenient summary of the debate, with extensive references to the literature, see Y. S. Park, The Link Between Special Drawing Rights and Development Finance, Essays in International Finance, no. 100 (Princeton, N.J.: Princeton University, September 1973). This content downloaded from 211.80.95.69 on Mon, 24 Jun 2013 04:23:40 AM All use subject to JSTOR Terms and Conditions

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