Creating An International Clearing System

From the Mexican peso crisis through the collapse of Long Term Capital Management, every defining event in international finance during the 1990s has been rooted in a silent, if commanding, reality: the global system of monetary relations is not really a system at all. At the dawn of a new millennium and in the face of enormous economic dislocation, the fate of the world's money and, inevitably, the welfare of its people depend upon a web of privatized arrangements unaccountable to any larger public purpose.

During the past quarter-century, these anchorless arrangements effectively displaced the post-war foreign exchange system fashioned at Bretton Woods in response to devastating currency instability in the previous decade. Despite giving rise to an unprecedented era of economic growth and stability, the Bretton Woods system broke down in the face of its own flaws, rapid technological change, concerted ideological pressures and sustained efforts to create lucrative spot, forward and futures markets in freely floating currencies.

Western governments began yielding to these pressures when President Richard Nixon ended the convertibility of dollars into gold and subsequently allowed the dollar exchange rate to float in response to changes in global supply and demand for the US currency. These actions effectively signalled the end of any stable basis for the international monetary system. During the next two and a half decades, governments acquiesced to the growth of an unregulated offshore eurodollar market that usurped the role of public institutions in recycling OPEC surpluses and eventually forced the rollback of financial regulation in national markets. Meanwhile, the privatized international monetary system expanded in both scope and volume. Increasingly, market participants grew to depend on over-the-counter derivatives markets to offset the volatility created by the abandonment of exchange and interest rate controls and the weakening of other monetary policy tools.

Nevertheless, establishment debate over monetary matters remains narrow, generally contenting itself with rehashing the relative merits of fixed versus floating exchange rate regimes. The Clinton administration did propose that the International Monetary Fund provide foreign central banks more reserves to preclude traders' bets against their national currencies. But experience clearly shows that these kinds of injections only reassure investors if coupled with policies that constrain economic growth. When growth falters, the resources invariably wind up as profits for speculators. Modest, well-intentioned adjustments to the prevailing international monetary arrangements are not capable of restoring financial stability or facilitating sustainable economic activity. A new system of currency relations is needed.

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