The Freeman 1972 - The Ludwig von Mises Institute

1972 IN SEARCH OF A NEW MONETARY ORDER 9peg, a wider bank, flexible exchangerates, or the creation ofnew reserve assets, such as SpecialDrawing Rights by the InternationalMonetary Fund. 7 But nomatter what solution they proffer,their point of departure is.the collectivistconcept of the "national"balance of payment. Without anyreference to individual actions andbalances, they build ambiguousstructures that ignore the causes.Balance of payments of a countryis that very small segment of thecombined balances of millions ofindividuals, the segment that is7 Cf. William Fellner "On Limited ExchangeRate Flexibility," Chapter 5 ofMaintaining and Restoring Balance inInternational Payments, Princeton UniversityPress, 1966; George N. Halm,"The Bank Proposal: The Limit of PermissibleExchange Rate Variations,"Princeton Special Papers in InternationalEconomics, No.6; John H. Williamson:"The Crawling Peg," Princeton Essays inInternational Finance, l'fo.50; FrancisCassell, International Adjustment andthe Dollar, 9th District Economic InformationSeries, Federal Reserve Bank ofMinneapolis, June, 1970; Walter S. Salant,"International Reserves and PaymentsAdjustment;" Banca Nazionale delLavoro, Quarterly Review, Sept., 1969;Thomas D. Willet and Francesco Forte,"Interest Rate Policy and External Balance,"Quarterly Journal of Economics,May, 1969; Friedrich A. Lutz, "MoneyRates of Interest, Real Rates of Interest,and Capital Movements," Chapter 11 ofMaintaining and Restoring Balance inInternational Payments, Princeton UniversityPress, 1966; Milton Gilbert, "TheGold-Dollar System: Conditions of Equilibriumand the Price of Gold," PrincetonEssays in International Finance, No. 70.based on personal exchangesacross national boundaries. As anindividual may choose to increaseor decrease his cash holdings, somay the millions of residents of agiven country. But when they increasetheir holdings, that iscalled "favorable" in balance ofpayments terminology. And whenthey choose to reduce their cashholdings, that is called "unfavorable."The fact is that drains ofgold are not mysterious forcesthat must be managed by wisegovernments, but are the result ofdeliberate choices by people eagerto reduce their cash holdings.Wherever governments resort toinflation, people tend to reducetheir cash holdings through purchasesof goods and services. Whendomestic prices begin to rise whileforeign prices continue to be stableor rise at lower rates, individualslike to buy more foreign goods atbargain prices. They ship some oftheir money ab!oad in exchangefor cheaper foreign products orproperty. Thus, an outflow of foreignexchange and gold sets in. Itis the inevitable result of a rate ofdomestic inflation that exceedsthat of the rest of the world andsets into operation "Gresham'sLaw."During the 1960's, the decade ofthe "Great Society," and againduring 1970 and 1971, money andcredit were created at unprece-