The problem with words
Ah, those pesky words. They do not mean what we think they do. And sometimes we say one thing, but people think we mean another.
And so it is that David Glasner, in a beautifully crafted takedown of my previous post, has managed to miss my point entirely.
I did, in fact, read carefully all of David's quotation from Ralph Hawtrey, though I did not quote all of it. Hawtrey's point is that what appeared to be destructive competitive devaluation as countries left the gold standard was in fact beneficial loosening of domestic monetary policy. His fishing fleet did indeed all come safely into harbour, eventually.
This was also my point, and the reason why I highlighted Hawtrey's gold standard thinking. Hawtrey understood that in a gold standard system, loosening domestic monetary policy must involve deliberate devaluation versus gold. Indeed in any fixed currency peg system, monetary loosening requires explicit devaluation versus the commodity or foreign currency to which the currency is pegged. As David notes, the problem is distinguishing between devaluation to raise domestic AD (which as a side effect also improves the balance of trade), and devaluation specifically to seize export advantage. It is surprisingly difficult to draw this distinction in practice: the reality is that those earlier into harbour do fare better than the late arrivals, which gives the impression of beggar-my-neighbour policy even if that is not what is intended.
But in a floating rate system, devaluation is a consequence of monetary loosening, not a cause of it. So deliberate devaluation in a floating-rate system would be beggar-my-neighbour policy, even if the stated purpose was domestic AD support. Central banks use weasel words.
However, under either system, there is no sense in which "competitive" can ever be an accurate description of devaluation arising from domestically-focused monetary policy. So Hawtrey was not in fact advocating competitive devaluation at all. His point was that the apparent "competition" was illusory.
My critique of David therefore rested on his apparent advocacy of competitive devaluation, in contradiction of Hawtrey's argument. But David says that was illusory too. Words, again.
The problem with words was brought forcibly home to me in Giles Wilkes' reaction to my post. My final paragraph includes the following sentence:
Of course, if the world were to reintroduce some kind of common currency standard such as gold, we might be able to return to exchange rate targeting as a policy response.Giles thought this meant that I was advocating returning to the gold standard. Dear me, no. That is the last thing I would suggest. But reading it back, I can see how my words could be interpreted in that way. What I meant, of course, was this (which you will find in the comments):
I see absolutely no benefit in returning to a gold standard, or to any managed exchange rate system. Some countries do better with a pegged or managed exchange rate, but that is a local decision. But many do better with a free float: for example, the Russian central bank has given a textbook demonstration of the benefits of abandoning a fixed peg for a free float, which others should learn from. I think there might be some value in having an international medium of account (similar to Keynes's bancor), but it should be a floating rate system.Is it clear now? The sentence Giles took exception to is sarcastic (hence the reference to Mars in the next sentence). As is this phrase that David quotes:
If the US eased monetary policy in order toThis is a reference to deliberate devaluation in a supposedly floating-rate system, described as domestic AD support but in fact aimed at creating a trade surplus. Hence the strikethrough. I do not think the US has done this, actually. But I am fairly sure the ECB has.
devalue the dollarsupport nominal GDP, the relative prices of imports and exports would rebalance - to the detriment of those countries attempting to export to the US.
But beggar-my-neighbour competitive devaluation is not the only form of destructive exchange rate policy, nor even the worst. On Twitter, Iron Economist pointed out that deliberately propping up a currency is every bit as common as deliberately devaluing it. Here, for example, is Winston Churchill, in 1925, justifying a catastrophic decision to return to the gold standard at the pre-WW1 parity on grounds of imperial supremacy:
Thus over the wide area of the British Empire and over a very wide and important area of the world there has been established at once one uniform standard of value to which all international transactions are related and can be referred. That standard may, of course, vary in itself from time to time, but the position of all the countries related to it will vary together, like ships in a harbour whose gangways are joined and who rise and fall together with the tide. I believe that the establishment of this great area of common arrangement will facilitate the revival of international trade and of inter-Imperial trade. Such a revival and such a foundation is important to all countries and to no country is it more important than to this Island, whose population is larger than its agriculture or its industry can sustain, which is the centre of a wide Empire, and which, in spite of all its burdens, has still retained, if not the primacy, at any rate the central position, in the financial systems of the world.(quoted in Tony Norfield's book "The City")
Interestingly, Churchill's description of the ships in the harbour all rising together with the tide is the same analogy as Hawtrey used. Yet he was arguing for a strong currency policy, whereas Hawtrey was arguing for devaluation. Metaphors are profligate.
Churchill's decision was roundly criticised by John Maynard Keynes in a pamphlet entitled "The economic consequences of Mr. Churchill", in which Keynes rightly ignored Churchill's imperialist agenda and focused on the domestic effects of a seriously overvalued pound sterling. But this is not the only example of disastrously strong sterling policy. As I showed in this post, the UK is a serial offender, though it has (fortunately) allowed the pound to float freely since its departure from the ERM in 1992. Not that it is alone. Many countries have played the strong currency game, usually with unfortunate consequences. The latest player is China, which has backed away from floating the onshore yuan and is currently holding it at too high a level. I fear this will not end well.
It was, of course, destructive STRONG currency policy of this kind that Hawtrey was really criticising. Many Western countries clung to the gold standard in the teeth of the Depression, to the detriment of their domestic economies and the welfare of their citizens. As countries were, one by one, forced to abandon the gold standard, their currencies devalued, making matters even worse for those still desperately holding on. Consequently, those that left the gold standard early, such as the UK, fared far better than those that remained on it for longer, such as the USA. This has been brilliantly documented by Barry Eichengreen in his book "Golden Fetters".
Anyway, my sincere apologies to David for misunderstanding his point. But perhaps he will acknowledge that he has also misunderstood mine. Deliberate devaluation for competitive purposes is destructive. And words are slippery things.
UPDATE. Andrew Lainton looks at the accounting-identity violation inherent in competitive devaluation. It is not possible for all countries to run a trade surplus: if all try to, then the result is a significant contraction in global trade. And even with trade contraction, someone, somewhere has to run a substantial trade deficit if most of the world is competing for export advantage. That is what I meant when, in my previous post, I said the world is once again trying to cast the USA in the role of consumer-of-last-resort. We do not yet trade with Mars.