Transcript Barry Eichengreen: Pegged exchange rates

00:00 I’m Barry Eichengreen and I’m here to talk about pegged exchange rates; past, present, and maybe future; and specifically about similarities and differences between the gold standard 100 years ago and the Euro system today.

00:21 Exchange rates that vary by a lot can create problems. They can disrupt trade flows, if currency depreciates loses value that can result in inflation.

00:37 So politicians worry about this phenomenon and in response they’ve devised a variety of rules to try to keep exchange rates stable. One example would be the gold standard of the late 19th century, another example would be the European monetary system of the 1980s and 1990s. An extreme example would be the Euro which addressed the problem of exchange rate instability by abolishing exchange rates.

01:05 All of them have really had a important country at the centre–under the gold standard it was Great Britain, under the European monetary system Germany and the deutsche mark. The euro was an effort to create a symmetrical system without a centre country where every country was equally responsible for the governance. That hasn’t worked out too well in practice.

01:33 I think what you learn from that history is that fixed exchange rate systems like the gold standard are fragile. Those systems can also create special problems and in the face of major shocks when one country experiences a financial crisis that’s more severe than the others, if it is locked into a system where it cannot change its exchange rate then the central bank cannot act as a lender of last resort. It’s not possible to cut interest rates and try to bring the unemployment rate down. It’s not possible to depreciate the exchange rate and boost export competitiveness.

02:15 So that’s why most scholars of gold standard of the 1920s and 1930s think that its existence in fact worsened the Great Depression.

02:27 European countries like Greece have similarly been constrained. They’ve been unable to loosen monetary policy, they don’t have their own monetary policy. They can’t step the exchange rate down to boost their export competitiveness so they’re really stuck. And they’re stuck to an even greater extent than countries were under the gold standard because the euro is harder to abandon. Under the gold standard you still had your own currency.

02:55 I think there are key takeaways from this historical experience–if you’re gonna have a pegged exchange rate you need a very flexible domestic economy. Most countries can’t raise or lower wages and rents overnight. You need other policies or policy mechanisms that can substitute for the missing monetary policy.

03:18 So in the United States we have a federal system of taxes and transfers, nothing like that exists in in Europe. I think history shows that you need a high level of labour mobility in order to make a pegged exchange rate system work. There are large labour flows between US states. Europe doesn’t have labour flows–Europe has a dozen different languages and more.

03:46 History doesn’t repeat itself, although it rhymes.