Review: The trappings of global money
By Robert Cole
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
When it comes to describing what went wrong, Robert Pringle’s new book, “The Money Trap”, is hard to fault. The editor of the trade journal Central Banking is also right that finance needs reform so it can better serve people, rather than financiers. Pringle deserves praise for offering an alternative financial architecture. But his bold prescription, though intriguing, is imperfect and unrealistic.
“The Money Trap” clearly and comprehensively charts the development and operation of the two historic examples of international financial systems: the first based on gold and the second that grew out of the Bretton Woods conference of 1944. The book’s analysis of the imbalances, the bubbles and the busts that pockmark financial history is well crafted. Pringle is also sharp. For example, in his dissection of the most recent crisis, he cites Walter Bagehot, saying that governments should have saved solvent banks but punished individual bankers. Instead, writes Pringle, “They saved the bankers but let confidence collapse.”
At the heart of his recipe for improvement is a new monetary unit, the ikon. The ikon would be an objective “measuring rod” against which national, and pan-national currencies such as the euro, can be referenced. Individual nations, he says, could retain authority over monetary and fiscal policies. Indeed, he is at pains to emphasise that an ikon would not be a common currency but a global monetary unit of account. He also suggests, albeit tentatively, that its value might be determined by the combined value of global equity markets.
It is a nice idea. An unit of account which is not a currency but which is geared to the size and sum of human economic activity – a concept also promoted by financial reformer Robert Shiller – would have some of the strengths of the gold standard, but without the dependence on the accidents of metallurgy. The equity-linked ikon, though, is imperfect, because global equity markets reflect only a part of human economic activity. Wouldn’t Shiller’s suggestion of real GDP be a better proxy?
Pringle’s desire to see a wholly new global financial system is simultaneously unrealistic. Without a much-worse crisis than the last one, highly politicised governments are not going to agree to surrender so much financial power, and responsibility, to the vagaries of international consensus.
Pringle’s idealism for the future sits also uneasily with his critical analysis of the past. He is not the first to single out Hank Paulson, the former Goldman Sachs chief who was U.S. Treasury secretary from 2006 to 2009, for withering criticism. But he does say that Paulson made “the biggest mistakes” in the most recent crisis and that his career experience meant “he should have known better”. And if Paulson did not know better, and if so many other people in authority performed so lamentably, why is it realistic to expect good leaders will be found to serve future generations?
The world’s financial system may well be trapped inside its own inadequacies, as Pringle says. Freedom may come with the complete reconstruction of the global financial system, and the creation of a common monetary unit of account. But since it is so very hard to see Pringle’s theories put into practice, we may never know.