Looking at the economic history of the last Century is easy to recognize a cyclical pattern in which interventionists and free market policies have followed each other. The first half of the 20th century saw the collapse of the first wave of globalization (1870-1914) due to the abandonment of the Gold Standard during the World War I and the nationalist sentiment brought by the Great Depression. This was then followed by a focus on policy autonomy and financial stability that became central to the structure of the Keynesian International Economic Regime or the Bretton Woods Regime.
Keynes’ ideas on the need for strong financial regulation and governments controls on capitals and interest rates matched with the ideology emerged after World War II to consolidate the basis for a regime which main objectives were combating unemployment and promoting social welfare. The commitment of currency convertibility for current account payments, the gold-dollar standard, the adjustable peg exchange regime and moreover the acceptance of capital controls were key in shaping the economic golden age of economic growth that lasted from 1950 to 1970.
In 1960 Robert Triffin argued that the gold-dollar standard was inherently instable due to a US inner conflict of interests. According to Triffin, the tying of the regime to the US balance of payments was dangerous in the sense that the US had incentives to over print dollars in order to finance its deficit. Furthermore, the momentum achieved after the Second World War was over by the middle of the 60’s. And as a result of the Vietnam War and a rise in imports, the deficit increase in the US balance of payment precipitated the US abandonment of the “gold-dollar standard” in 1971. The collapse of the “gold-dollar” standard had important consequences for the global economic regime that have lasted until today.
The current Financial Regime has had the particularity of increasing economic instability and vulnerability. Its characteristics (flexible exchange rates, low financial regulation and lack of commitment to the use of capital controls) have undermined the autonomy of national governments to regulate their financial markets and to protect their citizens from the effects of speculative movements of capital. In addition the lack of a self-adjusting mechanism (like the one in the Gold standard) has produced serious problems to the “global balance of payments” that have tend to polarize countries between net debtors and others that are building huge reserves. In particular the devastating experiences of the 90´s in developing countries have highlighted the need for governments to build reserves to protect their currencies and export sectors.
Today history seems to be repeating and the effect of the last 40 years of low financial regulation is generating a protectionist move from developed and developing countries alike. Due to the liquidity injection in developed economies money is flooding emerging markets appreciating their currencies and affecting the relative prices of their exports.
It was thought that by abandoning the gold-dollar standard the world economic growth possibilities would be freed by allowing an increase in money supply and that it was going to be the solution of poverty by making money less scarce. In this context financial liberalization was a mechanism trough which that extra money supply would reach poor countries. However as Keynes found almost a century ago financial markets are far from being perfect, especially since they are governed by “animal spirits”.
Keynes analysis of the financial markets propensity to crises has been clearly undervalued in the light of the increasing political and economic power of global financial corporations. Today’s economic mess should be enough to make clear that government regulation at the national and supranational level is needed to control the speculative uses of capital and the negative effects of capital flows for the real economy. It is essential to recover the national monetary autonomy of every country and the power of governments to protect their citizens from economic shocks.
While there is clearly a strong need to make money accumulation costly, the current financial systems is on the contrary producing incentives for governments to build huge reserves. The problem is that along with money accumulation there has been an accumulation of power that is indeed complicating the global cooperation prospectus.
Only by making money accumulation costly we can reverse the income and power polarization that has been increasing in the last three decades and only then we can hope to solve the economic problems of our times.