UPDATE: 25 Mar 2009: In anticipation of the upcoming G-20 meeting and on the heels of some provocative comments made by Chinese officials regarding the US dollar, I would like to re-post this article from January. Paul Davidson has a very good plan on reforming the global monetary system here that needs MUCH more circulation.
Paul Davidson is a leading academic scholar in the field of Economics with a large catalogue of publications of merit. I would like to use this post to introduce you to him and a specific work of his that deserves more attention in the mainstream media. This post may be a bit wonkish, but I hope you will appreciate the message.
First, Davidson has been a professor at a number of leading academic institutions for nearly fifty years where he most noted as a progenitor of the Post-Keynesian school of economics. Here is how Wikipedia sums it up:
Paul Davidson (b. 1930, New York is an American macroeconomist who has been one of the leading spokesmen of the American branch of the Post Keynesian school in economics. He is a prolific writer and has actively intervened in important debates on economic policy (natural resources, international monetary system, developing countries’ debt) from a position that is very critical of mainstream economics.
Davidson did not originally choose economics as a profession. His primary training was in chemistry, for which he got a BSc from the University of Pennsylvania. In 1951 he worked in that same university as an instructor in physiology and chemistry. He soon switched to economics, receiving his MBA from the City University of New York in 1955, and completing his PhD at the University of Pennsylvania in 1959.
He has taught economics at University of Pennsylvania, Rutgers University, Bristol University, University of Cambridge, and the University of Tennessee. He is a Visiting Scholar at the Schwartz Center For Economic Policy Analysis at the New School for Social Research and is currently an Emeritus Holly Professor of Excellence at the University of Tennessee, Knoxville. He is especially known for promoting a Post Keynesian school of macroeconomics. He and Sidney Weintraub founded the Journal of Post Keynesian Economics in 1978. He is the Editor of the Journal of Post Keynesian Economics.
Now, the reason that Professor Davidson is relevant here has to do with the present economic crisis. Much of the panic from after the failure of Lehman Brothers has subsided. However, many challenges remain. In solving these challenges, our policy makers must take a long-term perspective in order to ensure that we do not have to face an epic downturn like this again. In my view, a true workout of our present economic ills necessitates the reform of our international monetary system.
Enter Paul Davidson. He has only just published a timely paper called “Reforming The World’s International Money.” In it he suggests that the fiat monetary regime that we have had since the end of Bretton Woods was always unsustainable and is now broken. A new international money is needed.
If we are to prevent a global Great Depression, it is time to restore Keynes’s vision of how the international payments system should work to permit each country to promote a national full employment policy without having to fear balance of payments problems or financial events occurring in other countries from infecting the domestic banking and financial system.
Edward here. You should note that Davidson is suggesting that a new monetary regime is in order now in 2009 in order to prevent a worst-case scenario. I have bolded the key parts of his argument below.
In The General Theory, Keynes argued that if an economy was operating at less than full employment, then the nation’s central bank, while maintaining the stability of financial markets, should focus on providing all the liquidity that the economy can absorb in order to reach full employment. For more than a quarter century after following World War II, the major central banks around the world tried to meet the role that Keynes had prescribed for them in his General Theory.
From the end of the war until the early 1970s most central banks tended to
provide increases in the money supply in response to any domestic or international increase in demand for the nation’s money, while maintaining interest rates at historic lows for prosperous times. This endogenous increase in the money supply tended to support expansion of aggregate demand that resulted in a golden age of economic growth and development for both developed and less developed capitalist economies….When, in 1973, the U.S. withdrew from the Bretton Woods Agreement, the last
vestiges of Keynes’s enlightened monetary approach were lost, apparently without regret or regard as to
- [a] why the Bretton Woods system had been developed in the first place and
- [b] how well it had helped the free world to recover from a devastating war which had destroyed much of the productive stock of capital in Europe and Asia.
In the decades since the breakdown of Bretton Woods, the world’s economic performance has been unable to match what became almost routine economic success in the quarter century since the end of World War II in terms of low rates of global inflation accompanied by high rates of employment and real growth.
Since 1973, however, international economic problems have multiplied, while significantly high rates of unemployment in many nations has again become the norm.
Under any traditional international free trade system, any nation that attempts to improve its economic growth performance by pursuing Keynes’s policies for increasing domestic effective demand via easy monetary and fiscal policies will almost immediately face an international payments problem.
However, under a fiat currency regime as we have today that is not the case. Davidson explains:
Since 1973, the conventional wisdom of economists and politicians is that nations should liberalize all financial markets to permit unfettered international capital flows to operate under a freely flexible exchange rate system. The current international financial market crisis is a result of permitting unconstrained international financial flows.
The question is what is the solution. The Gold Standard is often offered up as a potential solution. But, a true gold standard has not been in operation since 1914. And the price of making gold the standard for money is too much to bear, especially in this deflationary environment.
Davidson offers an alternative system. This system prevents a lack of demand (as under the gold standard). It automatically corrects imbalances like the U.S. current account deficit or the Chinese/Japanese surplus. And it provides a way to increase ‘dollars’ in circulation without debasing the currency. In short, it is a very good system.
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