Dr. Benn Steil, Manuel Hinds Money, Markets, and Sovereignty (2009)

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sus, economists of the 1960s and 1970s reconciled money and nationhood
through the development of OCA theory. Fathered in 1961 by a Nobel
Prize winning economist who has, paradoxically, emerged as the most
prolific advocate of shrinking the number of national currencies, the the-
ory evolved over the subsequent decades into a quasi-scientific foundation
for sustaining them.
Robert Mundell, like most mainstream macroeconomists in the early
1960s, shared a postwar Keynesian mindset that manifested great faith in
the ability of national monetary and fiscal policymakers to fine tune ag-
gregate national demand in the face of natural business cycles and what
GLOBALIZATION AND MONETARY SOVEREIGNTY 139
economists call shocks to supply and demand.19 His seminal article A
Theory of Optimum Currency Areas asks the question What is the ap-
propriate domain of the currency area?
It might seem at first that the question is purely academic, he observes,
since it hardly appears within the realm of political feasibility that national
currencies would ever be abandoned in favor of any other arrangement. 20
He then goes on to build an economic argument in favor of flexible ex-
change rates between regions, rather than nations, and to develop criteria
that would define the contours of such regions such that they would be op-
timal areas for the exercise of independent monetary policy.
It is important to note that, since Mundell s original OCA theory fo-
cused on an abstract notion of regions rather than actual countries, ap-
plying the theory to the real world could result in prescribing the use of
more than one currency in one country, or the use of one common cur-
rency among countries appearing to share the same business cycle, or even
the creation of currencies that would be common to parts of two or more
countries but not to the whole of any of them. The economics profession,
however, subsequently latched on to Mundell s analysis of the merits of
flexible exchange rates in dealing with economic shocks affecting different
regions or countries differently to provide a rationale for existing nation-
states as natural currency areas.21 The arguments were grounded in the
observation that with barriers to trade and labor mobility across borders,
activist national governments were needed to offset shocks such as a
shift in demand from the goods of country A to those of country B
through the control of national monetary policy. These were bolstered by
later econometric analyses of potential regional currency areas, such as the
pre-euro eurozone, which, particularly when using the United States as a
benchmark, tended to conclude that they were far from Optimum.22
Monetary nationalism thereby acquired a rational scientific mooring.
Much of the mainstream economics profession came typically thenceforth
to see deviations from one nation, one currency as misguided in the ab-
sence of prior political integration.
Decades after the publication of OCA theory, the number of currencies
in the world can, not surprisingly, be predicted much more accurately by
counting the number of countries than by trying to apply the theory to
the economic geography of the globe. In 1947, there were 76 countries in
140 GLOBALIZATION AND MONETARY SOVEREIGNTY
the world, today there are 193, and, with few exceptions, each country has
its own currency, noted economists Albert Alesina and Robert Barro.
Unless one believes that a country is, by definition, an optimal currency
area, either there were too few currencies in 1947 or there are too many
today. 23
Nonetheless, governments have learned to love the theory for its utility
as a scientific basis for countering those who deny the natural harmony of
money and nationhood. Ironically, Mundell has emerged as the most
prominent of the deniers. In the 1990s, he became a passionate supporter
of European Monetary Union, and is today widely referred to as the fa-
ther of the euro. In 2000, he did a lecture tour in Brazil expounding a re-
gional currency link to the dollar as means of bringing down interest rates
to U.S. levels and paving the way for an eventual Mercosur regional cur-
rency. A former Brazilian central banker cited Mundell against Mundell to
defend an independently managed Brazilian national currency, observing
that there is virtually no labor mobility between the Mercosur countries.
As a result, the region does not constitute an optimal currency area one
of Mr. Mundell s insights. As for the possibility of simply adopting the
U.S. dollar, as Panama, Ecuador, and El Salvador have done, the response
was more emphatic. It assumes, said the central bank s head of interna-
tional affairs, clearly offended, that we are incapable of implementing a
prudent and sustainable policy ourselves. 24
There has never been any serious political attempt at reforming the cur-
rent international financial architecture since its emergence in the 1970s.
The alarm bells that sounded during the 1998 Russian and Asian currency
collapses, clear manifestations of the system s dangerous vulnerability,
prompted a boom in academic currency crisis literature, but otherwise no
more than a shuffling of the deck chairs aboard the global monetary ship.
Strange Science
The rationale that OCA theory provided for separating regions
from the global monetary and financial markets was based on the proposi-
tion that macroeconomists had become so skilful that they could systemat-
ically outsmart the market, making it dance to their tune. Through their
manipulations of monetary variables, such as the rate of monetary cre-
GLOBALIZATION AND MONETARY SOVEREIGNTY 141
ation, the nominal interest rate, and the exchange rate, they could durably
improve the performance of the real economy increasing its rate of
growth when depressed, reducing it when overheating, increasing exports [ Pobierz całość w formacie PDF ]

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