The ge 10 A world central bank? Jobn Smithin and Bernard M. Wolf ou ree e cl vnslably Introduction When evshange rates first began loating inthe early eventieth century, in the aftermath of Workd War I, Keynes 1924, 187) weote that the academe dream of 4 hundred years, dotting its «3p and gown, clad in paper rags, has crept into the ‘world by means ofthe Bad fairies! This particular ‘dream’ came true once more half-century later, when the msjor cureencies began Moating again after the break-up of che Bretton Woods system in the eaely 1970s, However, co many, the resus inthe last quarter ofthe ewentieth century have not been 40 much a dream as a nighemare. The flexibility, and hence potential “olay, of evchange rates has been combined with other changes such athe ‘lobalizcon of financial markets, de-regulation financial liberalization, and tech ‘ical change ll of which have acted co greatly increase both the volume and speed ff international capital movements, The concern in such an environment is that, in balance of pasments adjustment, i s the capital account, including speculative pital movements, which dominates or drives the curtent account via exchange fate changes. The results on current sevouat, whether positive or negative a no longer peeceived as deriving from genuine economic effort, for example, a surplus arising if an economy becomes more ‘productive’ or ‘competitive’, but simply 35, 2 by product of capital market acs: By the ealy 1990s, The Economist maga tine had already dubbed this phenomenon *The fest of finance’? Indeed, at Some level it hardly matters whether or not the capital transfers are pejorarively Udesnibed at speculative’ or are regarded as appropriate responses to genuine eco- roomie incentives, In ether ease, the impact on the curtent account isthe same, Very clearly the actual course of events during the 1990s, including the crises in he exchange rte mechanism (ERM) in Europe in 1992/93, the Mexican peso crisis of 1994/95, and the Asian currency crises of lte 1997, has only served to increase the sense of apprehension regarding the international monetary system (IMS). Even though, 36 eaveat, ic should be noted that all of these episodes invohed attempes to Keep exchange rates fixed at inappropriate level (rather than just being due to the potential lexis of rates, iis nonetheless easy to under- Sond why these if A0W increasing interest in proposals for a restructuring oF fovamping of esisting international Financial instiutions (IIs), and for A world conceal bank? 213 thoroughgoing reform othe IMS itsel, These include proposals co restore fixed exchange rates (0 set up a world central bank (WCB) as inthe ttle ofthis ehap ter, to regulate capital tows by taxation or sine other meas, eo ftom existing [Fs such as the International Monctary Fund (IME), oto create a “ness Brett Woods" (Grieve Smith, this volume). Neverthelee sin earlier work (Smithin and Wolf, 1993), 6e remain sceptical ‘of both the feasibility and desiablity of sich 3 comprehensive instinuiona reform a the establishment of a WCB ia the contemporary global exonomie cn: vironment, The purpose of this chapter is to set out some ofthe reasons tor this scepticism, Many of these revolve around the likely dellationary bias of powertl Jnternationalfnanxil bureaucracies inthe contemporary soil and political er ronment, and mirror the concerns shih have frequen been expeesed about the regional Economic and Monctary Union (ENIU) or single cureeney sitive in Europe. However, there is also another stand tothe argument. Ia impli presumption of much of the literature on IMS relorm that the alternative, the ‘continued advocacy of appropriate nationally based public policy, is no longer ‘able in the emerging global economy, prevsely because ofthe inereased capital mobility referred to above. This is one aspect of what MeQusig (1998) has called the ‘ult of mpotence’ of “myth of powerlessness inthe context of globalization However, recently, authors such as Earwell (1996), Godley (1996), Paraskevopoulos, Paschakis and Smithin (1996), and Paschakis and Smithio (1998), have pointed tothe existence of mechanisms whereby small an medium: sized open economies can influence theit own economic destinies, even in 2 slobal environment characterized by sietally perfect capital mobility. These ‘mechanisms, though, ar critically dependent on the continued evstence of inde pendent national monetary systems, with exchange rates that are at least potentially free to change, even ifin practice they emain fue stable. In short, an independent monetary policy may be a necessary condition for an independent policy ro be pursued in other Reds, such as fsa policy, Iabour-market regulation, social protection, et, (Paraskevopoulos and Smithin, 1998, Smithin, 1998), This implies that there is a ‘downside’ co any kind of international solution which removes the possibilty for an independent policy, unles we can be very sure ofthe bona fides of those who will actually be cunning the powerful international “The potential ability of individusl political jurisdictions ro pursue independent polices does not, of court, ensure a desirable economic outcome cither forthe ‘economy concerned or the world economy asa whole It is just 38 possible, and ven likely, for independent national policy-makers to pursue perverse and det tionary policies as it is for international bureaucracies. In the best-case senar'o, however, coordinated or like-minded expansionary policies in & numberof juns dictions would foster world growth, and slow for eeasonable (real) exchange rate stability and approximate balance ofthe current and expital 2ecounts 3¢C085 uns dictions In the worsteate scenario in which the majority of countries were not taking such action, ie would sill be posible fr one or eve nations to escape Hom tlobal preeures by taking a contrarian stance. The contrarian nations would haveDLL Job Smithin and Bernard M. Wolf taser gromsth lower unemployment, a teal depreciation of the euereney, and cure rent acount suepluss at the expense of their partners who would! be in deficit Hu, even in hi case, there Would be othing,excepe perhaps the power of eas Salva sesed eres (Reve, 19S pret te dee nao ao re wie thcie some and sharing na gene prompt In Owe he reseration ths nator han sting esemiing wen! government Such poston doesnot, however fle oats wide varity of mor ied ag “ci fnew TEs or example chen na manage ost neronment ete Chance fF Ths woul be pam porn rom the poe ot iia uae ofthe cn. and desing th eri stons, ther eh Alternative models of global central banking “There are clearly s number of dtfeent ideas of what a insiution such as a WCB should look like, and several dened individual reform proposals. [tis not poss ‘le ta do justice tol the diferent potential variants in a short chapter, However, the siflerent models of global central banking can at least be grouped into three ‘nvoad categones forthe purposes of discusion. One which immediately comes t0 mind at the present time is something analogous to the European “single cur- reney", but on 2 global scale, That is, 2 world currency managed by a WCB similarly constituted to the proposed European Central Bank (ECB), and con- ovting monetary policy af if were 2 aational central bank, except chat its jumedicton would not be coterminous with a single territory under one govern~ ment. However, given the controversy ove the implementation ofthe European proposals even in the more eestrctedcegional context, it seems unlikely chat pro: posal fora world currency area praca option 2 this stage, Posibly more realistic are aos proposals drawing their original inspiration fom the plans which were an the eable during World War Il inthe negotiations Teading up to the esablshment af the Bretton Woods system; for example the “Keynes Plan’ tor an International Clearing Union (ICU), or the eval "White Plan fon which the Breston Woods setement was atualy based. In other words, the second broad category of WCB models are those seeking to adapt something, slong the ines of the ICU concept to the circumstances and conditions of she present day These would involve an ICU, possibly ising an international cur- fency tor use 38 a numersie in balance of payments settlement, fited but aujostable exchange rates between the major players, and a set of rules, which Could possibly include eapital controls of some kind, designed ro ensure the sooth operation of the system, There are obsiously a number of possible variants ton this outline and various strategic choiees to be made in the design of such a Sestem, co be discussed in more deal below. Far example, iis possible in princi Pe to separate or de-couple’ 2 revceve cteating oF suing funetion trom the A url coneral bank? 215 particular exchange rae regime. In other words, ahncaing an internatanal cur reney for use as 2 numeraire in balance of payments settlement would be ‘compatible with either a Bretton Wovals-mype syste with tne but alse peg, a crawling peg, ara managed Hose system, ‘The final WCB model is nor so much a plany asa desertion af what has fe quently occurred during the history of the IMS. This is the growth ot a “hegemonic” system of relationships henween international financial mctsnrks (Eiehengreen, 1989: Gray, 1992}, The curseny nf ene panei natin th world eonomy emerges 36 esenrialy 2 work! mney. The ental bank a the hhegemon effectively becomes the world cental hanks is Habits become the orld stndand of salve and ultimate means af payment. The mancary pcs this central bank sets the tone for world whonetary plcy ay well ay domesth monetary policy: Obsious examples wold be the role ofthe Banka England and ‘the pound sterling during the ninetceath and csely twentieth ventures and hat of the Federal Reserve Board and the US dolar in the mis-nventicth vents. In ‘more recent years, the dominance ofthe German Bundesbank over the European ‘Monetary System (EMS) during the 1980s and carly 1990s provi an example fof a hegemonie system at a more restricted (regional) vel. Experience sucess that the emergence of world or regional ‘monacentres' 10 use Hicks’ (1982, 1989) expression, is based on fil crude indicators of national exonomic succes Basiealy 2 country seems co be able to claim a leing position foe its central bank if over time it has buile up a dominating net credit position. Whether on the resulting system is succesful clearly depends on the polisies which thew the hegemonic central bank pursue, For example, it could be argued that thet! ative prosperity of the quarter-ofa-century afer Word War Il was faltated by ‘the expansionary instincts ofthe US policy authorities during this pero, partis tlarly 2s exemplified by the European Recovery Plan, whereas in more recent times, the Bundesbank has spread deflationary pressure across Europe In the context of the present argument, itis sn extremely important sue whether or not the relative economic prosperity ofthe Bretton Woods era as ue to the detailed planning and suscessful implementation of the treaty. terms of both the operating rules and the IFls which were created, or rather duc 10 his torical circumstances which would include the particular set of policies pursued bs the major player, the USA. Hicks 1986, 22-23) was in no doubr. In searchin tor the explanatory fictors regarding economic pettormance down co the early 1970s, he remarks “The fist step. to recognise that Bretton Wood, the IMF, and ll hat, was largely a facade. The reality behind it was che US dollar. I was pect abv ‘ous, in the 19505, much more than it had been in the 1920s, that meres was ‘the superpower, not only in the politcal, but sto in the nancial world it ‘eame about without anyone having said chat it shoul! come about thatthe dollar became the international currency... the dollar Became the cence of the world monetary system, the IMF being no more than ane of the roures bs which. [other]... currencies. were converte into das216 Job Smihin and Bernard M. Wolf Hicks (1986, 28) then goes on to pone out the ain way in which the system dit ‘rod feom previous interaational inansial reg (ovlhae made 9 diference was a general feeling, which in former days had hardly existe, that the government ofeach nation had a eesponsibilies, aot bly. for maintaining the value ofits money but also foe maintaining the volume oF employment. These... responsibilities gould... lash; but fon the whole inthe Brerton Woods period they balanced exch other {in the early posta period, Sc sana to Europe and Japan from the USA, Ipecame the chief means of keeping the system from going under. The USA, which hu been reluetant t0 accept the obligations of ehiet creditor nation is Kesnes’s ICL’ plan, went well bevond its Formal IMF obligations. It provided enormous liquidity forthe IMS through the Marshal Plan for Europe and the Doalge Plan Yor Japan. One of the Renctions of the Marshal Plan was to undse- write the European Payments Union (EPU) chat became the instrument for cestored convertibility of the key European currencies. The salient poine here it that it was the change in climate or economic philosophy, particulary in the USA, rather than the detailed rules and eegulations act out in the inteenaional treat, which proved decisive ‘The majority of contemporary seloem proposals nonctheless have focused on the question of institutional eform. frequently involeing the creation of some form of clearing union 3s in Kernes, and also often stessing the importance of exchange eate stability: In summarizing a number of the proposals, Dow (1997) has argued that the preferred Post Keynesian option isto design an international money, for ‘hich a global agency acts as a central bank; that money's atributes must be suet ab to make i che preferred money, relative to national currencies. Davidson (1991, 1994, 1996) has pu forward detailed set of proposals, very much inthe tration of the ICU, whish involves the eration of unionized ‘nonetaty system (UMS), im which national currencies ae locked together a aed exchange rates, Thete would also bean international clearing agency (ICA) to lear act Balances between counties in term ofan iterations! money Clea ing unit (IMCU), which would be "money’ only for these purposes. The exchange ates would be fixed in terms of the IMCU, but, a under Breton Woods, they would be adjustable if unit costs in the different counties go 100 far out of ine, ‘Greve Smith (1997) put forward a "en-pine pln’, denongst the key eaures of which would be new managed exchange ate egime, in which changes in par- ies should be “relatively small and fequent™ (1997, 221-22) rather than the teaumatic pola rises they have ofen een in the pst, and ako the establish ment ofa ev international stabilization find (IES) with very large resources and A world contra! bani? 217 necessary, Another important aspect wold be seo snes to ur spelt capital movements involing both taxation: lv example, vanants of the fines “Tobin tax’ (Tobin, 1978), sod the international regulition si supersisin Financial institutions So the question of che carrxt institutional design remains very ach on th agenda, witha crucial question being whether soy or allo thes te shen ‘would work out in practice a8 they ould on pap Money and economic governance ‘The ise which ultimately ies behind disagreeanents over the appropiate fsa ial architecture, whether on & national or international scale, 8, ot eres. the felationship between money and power Inthe case WF 3 Maasehe-rpe te the world as 3 whole, and certsiny in the case of the hegemonic sstems which arose in the past, the nature ofthe posse relationships, and where power finals resides, would pechaps be uty obvious. t must be stressed, however that some issues must inevitably arse in the establishment of 3 new ICU, ICA, o¢ SF. or whatever acronym is finally applied to a nes global agency Perhaps as Hicks has suggested, the IMF under Bretton Woods 35a facade, concesing the reli 0 US domination. However, any new agency, assuming that i + to hase the resources cequred 0 perform the job expected ait, that is to maintain a regime lof reasonably stable paties, achieve symmetry in balance of payments jst. and curb speculation, must inevitably dominate world monetary poi. Asin his. torical eases ofhegemonic systems, the WCB would be elective setting the tone for global interest rates, and in che Final analsis determining che pace of expansion of the systern as 2 whole In the historic discussions about Berton Woods, now more than halfa-cenrury ago, it scems thatthe issue of responsibil for global monetary policy was not squarely addeessed. Inhovered'pn the edge ofthe discusions.The emphasis was primary on symmetry, ie-achievement of orderly balance of payments adjust ‘ment and so on, and not the overall direction ofthe system, Certainly a major part ‘of the emphasis on symmetey was t0 aid the dltinnary bss of eather systems such as the gold standard, in which all che burden of adjustment was placed on debeor rather than creditor nations. This found final expresion in the famous ‘scarce curcency clause’ of the Bretton Woods agreement.» Whether or not 3 Aeflationary bias should be replaced with an expansionacy bias was let impli. Jo fact, Keynes (1944; 1980, 16-19) explicly defended the final Bretton Wools agreement precisely on the grounds that i preserved the ability of the various national authorities to pursue independent "Keynesian polices. Ina speech t the House of Lords in 1944, he argued 35 follows: ‘We are determined that in future, the external valu of sterling shall contr tolts internal vlue as se by our own domestic policies and not the other wav around, Secondly, we intend to retain control pf our domestic rate of inter,