All posts in category Exchange rate policy

If just David Glasner was ECB chief…

The all-knowing David Glasner has a fantastic post on his blog uneasymoney.com putting the euro crisis into historical perspective. Glasner – as do I – see very strong parallels between the European crisis of the 1930s and the present crisis and it the same “gold standard mentality” which is at the heart of the crisis. Too tight monetary policy and not overly loose fiscal policy is really the main cause for the European crisis.

Here is Glasner deep insight:

“If the European central bank does not soon – and I mean really soon – grasp that there is no exit from the debt crisis without a reversal of monetary policy sufficient to enable nominal incomes in all the economies in the Eurozone to grow more rapidly than does their indebtedness, the downward spiral will overtake even the stronger European economies. (I pointed out three months ago that the European crisis is a NGDP crisis not a debt crisis.) As the weakest countries choose to ditch the euro and revert back to their own national currencies, the euro is likely to start to appreciate as it comes to resemble ever more closely the old deutschmark. At some point the deflationary pressures of a rising euro will cause even the Germans, like the French in 1935, to relent. But one shudders at the economic damage that will be inflicted until the Germans come to their senses. Only then will we be able to assess the full economic consequences of Mrs. Merkel.”

If just Glasner was ECB chief the world would be so much different…

5 Comments
by Lars Christensen on November 10, 2011  •  Permalink
Posted in David Glasner, Economic and monetary history, euro crisis, Exchange rate policy, Monetary institutions, NGDP Targeting, Nominal Income Targeting, Reading recommendations, The euro
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Posted by Lars Christensen on November 10, 2011

https://marketmonetarist.com/2011/11/10/if-just-david-glasner-was-ecb-chief/

Germany 1931, Argentina 2001 – Greece 2011?

The events that we are seeing in Greece these days are undoubtedly events that economic historians will study for many years to come. But the similarities to historical crises are striking. I have already in previous posts reminded my readers of the stark similarities with the European – especially the German – debt crisis in 1931. However, one can undoubtedly also learn a lot from studying the Argentine crisis of 2001-2002 and the eventual Argentine default in 2002.

What this crises have in common is the combination of rigid monetary regimes (the gold standard, a currency board and the euro), serious fiscal austerity measures that ultimately leads to the downfall of the government and an international society that is desperately trying to solve the problem, but ultimately see domestic political events makes a rescue impossible – whether it was the Hoover administration and BIS in 1931, the IMF in 2001 or the EU (Germany/France) in 2011. The historical similarities are truly scary.

I have no clue how things will play out in Greece, but Germany 1931 and Argentina 2001 does not give much hope for optimism, but we can at least prepare ourselves for how things might play out by studying history.

I can recommend having a look at this timeline for how the Argentine crisis played out. You can start on page 3 – the Autumn of 2001. This is more or less where we are in Greece today.

6 Comments
by Lars Christensen on November 2, 2011  •  Permalink
Posted in Banking crisis, Economic and monetary history, euro crisis, Exchange rate policy, Gold Standard, MM Research agenda, Monetary institutions, The euro, The Great Depression
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Posted by Lars Christensen on November 2, 2011

https://marketmonetarist.com/2011/11/02/germany-1931-argentina-2001-greece-2011/

Milton Friedman on exchange rate policy #6

Gold standard?

The last remnants of the global gold standard system died when the Bretton Woods agreement collapsed in 1971, but the notion of a global currency system based on a gold standard occasionally pops up in both general and academic debates, especially in the USA.

Friedman was never any great proponent of the gold standard or other goods-based currency systems. He sees a gold standard system as neither possible nor desirable in a today’s world: undesirable because its reintroduction would imply enormous costs in connection with purchasing gold, and not possible because the “mythology” that surrounded the gold standard in the nineteenth century no longer exists. In the nineteenth century everyone expected changes in the money supply to be determined by developments in the price of gold, and that money and gold were close substitutes. Today, we expect the central bank – not gold – to ensure the value of our money. A reintroduction of the gold standard would require a shift in this perception.

In the nineteenth century the gold standard ensured low (or more correctly no) inflation for long periods of time. On the other hand, prices fluctuated considerably from year to year as gold production rose and fell. According to Friedman this was possible because the goods and labour markets were much more flexible at that time than now. Any attempt to reintroduce the gold standard now would result in exactly the same negative outcomes as a fixed exchange rate policy.

Despite the global gold standard having been abandoned many years ago, most central banks continue to own large amounts of gold. Friedman’s view is that one should fully acknowledge the end of the gold standard system and auction off the gold reserves of the central banks.

This concludes my little series on Milton Friedman’s view on FX policy. See the other posts here:

Milton Friedman on exchange rate policy #1
Milton Friedman on exchange rate policy #2
Milton Friedman on exchange rate policy #3
Milton Friedman on exchange rate policy #4
Milton Friedman on exchange rate policy #5

2 Comments
by Lars Christensen on November 2, 2011  •  Permalink
Posted in Exchange rate policy, Exchange rates, Gold Standard, Milton Friedman, MM Research agenda, Uncategorized
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Posted by Lars Christensen on November 2, 2011

https://marketmonetarist.com/2011/11/02/milton-friedman-on-exchange-rate-policy-6/

Milton Friedman on exchange rate policy #5

The euro – “a great mistake”

The European Monetary Union came into being in 1999, with the euro being introduced at the same time (as “account money”, and in 2002 as physical currency). Milton Friedman was an outspoken critic of this project, and his criticisms can be traced all the way back to “The Case for Flexible Exchange Rates” from 1953. The basic idea behind the euro is that to exploit the full potential of a single European market for goods, capital and labour – the inner market – a single common currency is essential. Friedman opposes this idea, as his view is namely that free trade is best promoted through floating exchange rates when wage and price formation are sluggish.

In Friedman’s eyes the euro area is not an optimal currency area, as the European goods and labour markets are still heavily regulated, and so prices and wages are relatively slow to adjust. At the same time, the mobility of labour between the euro countries is limited – due to both regulations and cultural differences. If this situation is not changed, it will, according to Friedman, inevitably lead to political tensions within the EU that may reach an intensity the European Central Bank (ECB) cannot ignore.

An asymmetric shock to one or more euro countries would require real national adjustment (price and wage adjustments), as nominal adjustments (exchange rate adjustments) are not possible within the framework of the monetary union. In Friedman’s view this would spark tension between the countries hit by the asymmetric shock and those not affected. Thus the euro might actually fan political conflict and the disintegration of Europe – which is in diametric opposition to the founding idea behind the single currency.

For Friedman the euro is not primarily an economic project. Rather, Friedman views the euro as basically a political concept designed to force further political integration onto Europe. Friedman believes that in the long run no country can maintain its sovereignty if it abandons its currency. The integration of the goods, capital and labour markets in the euro member countries is a prerequisite for the euro to function, and according to Friedman this can only happen through further political integration – something he fears will lead to the formation of a European superstate.

Recent developments unfortunately have proven Friedman’s analysis right…

5 Comments
by Lars Christensen on November 1, 2011  •  Permalink
Posted in euro crisis, Exchange rate policy, Exchange rates, Milton Friedman, MM Research agenda, Monetary institutions, The euro, The Great Recession
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Posted by Lars Christensen on November 1, 2011

https://marketmonetarist.com/2011/11/01/milton-friedman-on-exchange-rate-policy-5/

Milton Friedman on exchange rates #4

Always floating exchange rates?

The theoretical literature often distinguishes between completely fixed exchange rates on the one hand and freely floating exchange rates on the other. Milton Friedman has pointed out, however, that this sharp distinction often does not apply to the exchange rate regimes that are used in practice. As well as the two “extremes” (completely freely floating exchange rates in which the central bank never intervenes, and a firmly fixed exchange rate with no fluctuations allowed), a common system is to have fixed but adjustable exchange rates – or rather exchange rate bands. The Danish krone, for example, can swing freely within a band of +/- 2¼% around the “fixed” euro exchange rate of 7.44 kr. per euro.

The three global majors, the US dollar, the Japanese yen and the European euro do float freely against each other – as do a number of smaller currencies, such as the Swedish krona, the British pound, the Korean won and the New Zealand dollar. However, even such in principle freely floating exchange rates do not prevent the central banks of these countries from being active in the FX markets from time to time.

A system with fully fixed exchange rates is in practice the same as a monetary union and involves the complete abolition of any form of monetary independence. One example is Hong Kong. The Hong Kong Monetary Authority is obliged at all times to exchange US dollars for a fixed amount of Hong Kong dollars (7.8 Hong Kong dollars per US dollar). This means in essence that Hong Kong is in a monetary union with the USA – the only difference is that Hong Kong has its own banknotes. A second example is the European Monetary Union, where all members have given up monetary independence and left all monetary policy decisions to the European Central Bank.

An example of a system with fixed but adjustable exchange rates is the European fixed exchange rate mechanism, the EMS. Members of the EMS pursued a mutual fixed exchange rate policy – or more correctly, exchange rates were allowed to float within a narrow band and the various central banks were obliged to ensure (via for example changes in interest rates or intervention in the FX market) that they remained there. Denmark, Latvia and Lithuania currently follow a fixed exchange rate policy within the framework of a similar system, ERMII.

According to Friedman, however, a system of fixed but adjustable exchange rates is the worst of all worlds. Such a system means that the country abandons the option of an independent exchange rate policy. However, at times the need to use the exchange rate policy for “domestic purposes” – for example to tackle an asymmetric shock – will be irresistible, and the country will then either have to adjust exchange rates (devalue or revalue), or completely abandon the fixed exchange rate policy. This will, meanwhile, cause uncertainty in the FX market about just how “fixed” the policy is in reality. Thus a system with fixed but adjustable exchange rates will always be a potential “target” for speculative attack: one has so to speak closed the door, but not locked it. In a monetary union with irrevocably fixed currencies one has, in contrast, closed the door, locked it and thrown away the key – there is simply no doubt about how solid the fixed exchange rate policy is and thus speculation in exchange rate movements will therefore cease.

Hence for Friedman the choice is between either a freely floating exchange rate or some form of monetary union. Friedman has over the years presented the criteria by which to choose between the two exchange rate regimes. Basically there are six criteria that a small country (A) should consider when deciding its exchange rate policy in relation to the “rest of the world” (country B):

1.     How important is foreign trade for the economy of country A?

2.     How flexible are wages and prices in country A?

3.     How mobile is labour across national borders?

4.     How mobile is capital?

5.     How good is monetary policy in country A and the “rest of the world”?

6.     How are political relations between country A and the “rest of the world” ?

These criteria in fact define what in modern economics literature is termed an optimal currency area[1]. If there are close trade ties, high wage and price flexibility, and high capital and labour mobility between country A and the “rest of the world”, there is, according to Friedman, no reason why the two countries should not form a monetary union with a common currency.

Friedman stresses, however, that a country should not abandon its monetary policy independence to another country if that country is expected to pursue a poorer monetary policy than the first country itself would have done. Friedman places greatest emphasis on this criterion.

Despite Milton Friedman typically – and rightly – being labelled as the standard bearer for floating exchange rates, he often stresses that the choice is not easy, and he has repeatedly emphasised that countries have achieved both good and bad results with fixed and floating exchange rates. He points out for example that in 1985 Israel successfully implemented a fixed exchange rate policy against the dollar that helped cut inflation without causing any negative long-term economic repercussions.

By way of contrast, Chile implemented a fixed exchange rate policy against the dollar in 1976. Results were good for the first year following the implementation. However, when US monetary policy was seriously tightened between 1980 and 1982, causing the dollar to surge, monetary policy in Chile also had to be tightened: Chile suffered a serious economic setback, and in 1982 it abandoned its fixed exchange rate policy.

Friedman used the two cases above to underline that identical exchange rate policies can lead to different results. The outcome of the fixed exchange rate policy depends on how “lucky” one is with regard to the monetary policy in the country whose currency one has fixed to. Israel was lucky to introduce a fixed exchange rate policy at a time when monetary policy was relatively accommodative in the USA, while Chile was unlucky to fix just before US monetary policy had to be vigorously tightened. Or as Friedman says:

“Never underestimate the role of luck in the fate of individuals or of nations.”[2]

[1] The theory on optimal currency areas can be traced in particular back to Robert Mundell, see eg, Mundell, R. A., “A Theory of Optimal Currency Areas”, American Economic Review, Vol. 51, No. 4, September 1961, pp 657-665.

[2]”Money Mischief”, page 241.


9 Comments
by Lars Christensen on October 31, 2011  •  Permalink
Posted in Exchange rate policy, Exchange rates, Milton Friedman, The euro
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Posted by Lars Christensen on October 31, 2011

https://marketmonetarist.com/2011/10/31/milton-friedman-on-exchange-rates-4/

Milton Friedman on exchange rate policy #3

The fears of economists and politicians with regard to flexible exchange rates can largely be traced back to the policies of the 1920s following the collapse of the gold standard. The most famous criticism of flexible exchange rates is probably that made by the Estonian economist Ragnar Nurkse. Nurkse[1] claimed that the 1920s demonstrated that flexible exchange rates are destabilising.

Friedman, however, is fiercely critical of Nurkse’s view. First of all Friedman claims that currency speculation is stabilising and, second, that much of the historical volatility that can be observed in flexible exchange rates is in fact due to poor economic policy – primarily poor monetary policy – and not a result of “currency speculators”.

As mentioned Milton Friedman claims that currency speculation is stabilising not destabilising. The purpose of currency speculation is basically to buy cheap and sell expensive. If a currency deviates from its fundamental value – ie, is overvalued or undervalued – it would be rational for the “currency speculator” to expect that the currency would sooner or later move towards its fundamental exchange rate. If the currency is, for example, undervalued – ie, is cheap relative to the fundamental exchange rate – it would be rational to expect that the currency will eventually strengthen, and thus the rational speculator will buy the currency. If the majority of speculators act in this way, the exchange rate will all else equal be driven in the direction of the currency’s fundamental value – thus currency speculation is stabilising. Friedman argues furthermore that speculators who do not speculate rationally – ie, who sell when the currency is undervalued and buy when it is overvalued – will not earn money in the long run. Such speculators will soon be looking for a new job, and thus there will be a tendency for the number of “stabilising speculators” to be relatively greater than the number of “destabilising speculators”.

According to Friedman floating exchange rates will remain relatively stable if the FX market is left to its own devices. However, the problem is that governments and central banks have had problems keeping their hands off. Even in the 1920s and after the collapse of Bretton Woods in 1971 when flexible exchange rates were the norm, governments and central banks intervened in global FX markets. Friedman claims this has actually increased volatility in FX markets rather than stabilised exchange rates. As both the 1920s and the 1970s were marked by inappropriate monetary policies, this further contributed to unstable exchange rates. Put another way, floating exchange rates require sensible monetary policy. This implies that to ensure low and stable inflation one must let the supply of money grow at a low and stable rate.

Flexible exchange rates provide no guarantee of sensible monetary policy, but they are a precondition for an independent monetary policy. If a small country pursues a fixed exchange rate policy it will automatically be forced to follow the monetary policy of the nation(s) that dominate the currency system. This will be a particular problem if the “small” country’s economy is hit by what in the modern theoretical literature is called an asymmetric shock.

An asymmetric shock is an economic event (for example a strike or a shift in fiscal policy) that only affects one of the countries in a fixed exchange rate mechanism and not the others. One example of this is the reunification of Germany. Both fiscal and monetary policy were eased considerably in Germany at the time of reunification. This stoked inflationary pressure in Germany to a level that caused the German central bank, the Bundesbank, to tighten monetary policy again in 1992. Most EU currencies were at the time linked to the German mark under the European Monetary System (EMS). In the early 1990s, the other EU countries were struggling to break out of a period of low growth and the majority of the European economies had absolutely no need for the monetary tightening they were indirectly subject to via their fixed exchange rate policy with Germany. In 1992 Milton Friedman predicted the consequences for the EMS[2]:

“I suspect that EMS, too, will break down if Germany ever becomes unwilling to follow those policies, as it well may as a result of the unification of East and West Germany.”

The EMS broke down (partially) in 1993, proving Milton Friedman – as had been the case with the Canadian fixed exchange rate policy 43 years earlier – correct.

See also my posts in this series:

Milton Friedman on exchange rate policy #1

Milton Friedman on exchange rate policy #2

 

[1] Nurkse, Ragnar, “International Currency Experience: Lessons of Interwar Experience”, Genéve, 1944.

[2]“Money Mischief”, page 245.

12 Comments
by Lars Christensen on October 30, 2011  •  Permalink
Posted in Exchange rate policy, Exchange rates, Milton Friedman, MM Research agenda, The euro
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Posted by Lars Christensen on October 30, 2011

https://marketmonetarist.com/2011/10/30/milton-friedman-on-exchange-rate-policy-3/

“Chinese Silver Standard Economy and the 1929 Great Depression”

Only two major countries – China and Spain – were not on the Gold Standard at the onset of the Great Depression in 1929. As a consequence both countries avoided the most negative consequences of the Great Depression. That is a forcefully demonstration of how the “wrong” exchange rate regimes can mean disaster, but also a reminder of Milton Friedman’s dictum never to underestimate the importance of luck.

I have recently found this interesting paper by

Cheng-chung Lai and Joshua Jr-shiang Gau on the “Chinese Silver Standard Economy  and the 1929 Great Depression”. Here is the abstract for you:

“It is often said that the silver standard had insulated the Chinese economy from the Great Depression that prevailed in the gold standard countries during the 1929-35 period. Using econometric testing and counterfactual simulations, we show that if China had been on the gold standard (or on the gold-exchange standard), the balance of trade of this semi-closed economy would have been ameliorated, but the general price level would have declined significantly. Due to limited statistics, two important factors (the GDP and industrial production level) are not included in the analysis, but the general argument that the silver standard was a lifeboat to the Chinese economy remains defensible.”

If anybody has knowledge of research on Spanish monetary policy during the Great Depression I would be very interested hearing from you (lacsen@gmail.com).

PS Today I have received Douglas Irwin’s latest book “Trade Policy Disaster: Lessons From the 1930s” in the mail. I look forward to reading it and sharing the conclusions with my readers. But I already know a bit about the conclusion: Countries that stayed longer on the Gold Standard were more protectionist than countries with more flexible exchange rate regimes. This fits with Milton Friedman’s views – see here and here.

14 Comments
by Lars Christensen on October 29, 2011  •  Permalink
Posted in China, Exchange rate policy, Exchange rates, Gold Standard, Milton Friedman
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Posted by Lars Christensen on October 29, 2011

https://marketmonetarist.com/2011/10/29/chinese-silver-standard-economy-and-the-1929-great-depression/

Milton Friedman on Exchange rate policy #2

“The Case for Flexible Exchange Rates”

I 1950 Milton Friedman was attached to the US Economic Cooperation Administration (ECA), which was charged with overseeing the implementation of the Marshall plan.

The ECA wanted to see a common European market and therefore a liberalisation of intra-European trade and a breaking down of customs barriers between the European countries. Most European nations were, however, sceptical of the idea, as they feared it would lead to problematic balance of payments deficits – and thus pressure on the fixed exchange rate policy.

Once again the political dynamics of the fixed exchange rate system were stoking protectionist tendencies. This was an important theme in the memorandum that Milton Friedman wrote to the ECA on the structure of exchange rate policy in Europe. This memorandum, “Flexible Exchange Rates as a Solution to the German Exchange Crisis”, formed the foundation for his now classic article from 1953, “The Case for Flexible Exchange Rates”, in which he presented his arguments for floating exchange rates. The main arguments are presented below.

Friedman’s basic argument against fixed exchange rate policies is fundamentally political. He pointed out that the combination of inflexible wages and prices and a fixed exchange rate policy would lead to imbalances in the economy – such as balance of payments deficits. Friedman feared – and as in the Canadian example above also observed – that politicians would attempt to “solve” these problems through widespread regulation of the economy in the form of trade restrictions and price and wage controls – precisely what Friedman wanted at all costs to avoid.

When prices and wages are very flexible, imbalances can be corrected relatively painlessly via wage and price adjustments. Thus there would be no great need for changes in exchange rates. In the real world, however, wages and prices are not fully flexible, says Friedman, and so imbalances can arise when pursuing a fixed exchange rate policy. Sooner or later these imbalances will put pressure on the fixed exchange rate system.

According to Friedman there are two ways to solve this problem: either regulating the movement of capital and goods across international borders or allowing currencies to float freely. There is of course a third option – make prices and wages more flexible. However, this would require significant reforms, and Friedman is doubtful that politicians would choose this route – even though he might constantly argue for such reforms.

Thus for Friedman there are in reality just two options, and he is in no doubt that flexible exchange rates are by far preferable to further regulation and protectionism.

Friedman acknowledges that adjustment to a “shock” to the economy (for example a jump in oil prices) can happen via pricing. However, he states that prices are typically not fully flexible – in part due to various forms of government regulation – and that an adjustment of the exchange rate will therefore be much less painful.

Friedman illustrates this with the so-called Daylight-Saving-Time argument. According to Friedman, the argument in favour of flexible exchange rates is in many ways the same as that for summer time. Instead of changing the clocks to summer time, everyone could instead “just” change their behaviour: meet an hour later at work, change programme times on the TV, let buses and trains run an hour later, etc. The reason we do not do this is precisely because it is easier and more practical to put clocks an hour forward than to change everyone’s behaviour at the same time. It is the same with exchange rates, one can either change countless prices or change just one – the exchange rate.

According to Friedman, a further advantage of flexible exchange rates is that adjustments to economic shocks can be continual and gradual. This is in stark contrast to fixed exchange rates. Here, all adjustments have to take place via changes in prices and wages, and as prices and wages are sluggish movers, the adjustment process will be slow. This implies that the country will still at some point be forced to adjust its exchange rate (devalue or revalue), and these adjustments will typically be much greater than the continual adjustments that occur in a flexible exchange rate system, as imbalances will grow larger in a fixed exchange rate system than in a flexible exchange rate system.

Read on: Milton Friedman on exchange rate policy #3

See also my post: “Milton Friedman on Exchange rate policy #1”

18 Comments
by Lars Christensen on October 29, 2011  •  Permalink
Posted in Exchange rate policy, Exchange rates, Milton Friedman
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Posted by Lars Christensen on October 29, 2011

https://marketmonetarist.com/2011/10/29/milton-friedman-on-exchange-rate-policy-2/

Milton Friedman on exchange rate policy #1

There is no doubt that Milton Friedman is my favourite economist (sorry Scott, you are only number two on the list). In the coming days I will share my interpretation of Friedman’s view of exchange rate policy.

Friedman’s contributions to both economic theory and the public debate have had considerable influence on the organisation of the global financial system and the choice of currency regimes around the world. This can best be illustrated by looking at the history of global financial and currency developments.

Prior to the First World War the international currency system was based on the gold standard. Individual national currencies had a particular gold value and could therefore be exchanged at a specified and fixed exchange rate. Thus the gold standard was a fixed exchange rate system. The First World War, however, led to this system breaking down – mainly as a result of the warring nations cancelling the gold convertibility of their bank notes: They financed their military expenses by printing money. This subsequently created a level of inflation that was incompatible with the gold standard.

Attempts were made to reintroduce the gold standard after the First World War, but the Great Depression of the 1930s, among other things, made this difficult. Nevertheless, the idea of fixed exchange rates still enjoyed significant political support, and there was broad agreement among economists that some form or other of fixed exchange rate policy was desirable. Hence a further attempt was made after the Second World War, and in 1944 the so-called Bretton Woods system was established, named after the US town where the agreement was made to set up a fixed exchange rate system.

The Bretton Woods agreement meant that the US dollar was pegged at a fixed rate to the price of gold, while the other participating currencies (the majority of global currencies) could be traded at a fixed rate to the dollar, thus once again establishing a global fixed exchange rate system. The system, which finally broke down in 1971 when the USA decided to abandon the dollar’s fixed peg to gold, was in many ways the main reason for Friedman’s huge involvement in the currency issue – both from an economic theory and from a political perspective. Friedman was an outspoken critic of the Bretton Woods system right from its creation to its final demise in 1971, and he supplied much of the theoretical ammunition that President Nixon used to justify his decision to “close the gold window”.

Friedman made his first major mark on the international currency system in 1948, when on 18 April he took part in a radio debate with the deputy governor of the Canadian central bank, Donald Gordon, discussing among other things Canada’s fixed exchange rate policy.

In 1948 Canada was pursuing a fixed exchange rate policy within the framework of the Bretton Woods system. However, the policy had given rise to a number of problems – including increasing inflation – and the government and central bank were considering major intervention in the Canadian economy in an attempt to maintain the fixed exchange rate. Among the proposals was one to significantly curb imports to Canada. So it would seem that the desire to maintain a fixed exchange rate policy was leading directly to protectionism. Since the 1940s this political connection has formed one of Friedman’s key arguments against a fixed exchange rate policy.

While the Canadian government attempted to defend its fixed exchange rate policy with protectionism and wage and price controls, Friedman’s approach was completely different: abandon the fixed exchange rate policy and let the currency float freely. Gordon rejected Friedman’s prescription for Canada’s ills, but 18 months later, in September 1950, the country’s finance minister, Douglas Abbott, decided to take Friedman’s medicine, announcing:

“Today the Government … cancelled the official rates of exchange. . . . Instead, rates of exchange will be determined by conditions of supply and demand for foreign currencies in Canada.” (Quoted from Schembri, Lawrence, “Revisiting the Case for Flexible Exchange Rates”, Bank of Canada, November 2000).

Friedman could chalk up his first major victory in the currency debate – while the next was to come in 1971 when Bretton Woods was abandoned. In the intervening years Friedman made a huge contribution to changing how currencies and exchange rates are viewed in economic theory.

22 Comments
by Lars Christensen on October 28, 2011  •  Permalink
Posted in Economic and monetary history, Exchange rate policy, General economic theory, Milton Friedman, Monetary institutions
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Posted by Lars Christensen on October 28, 2011

https://marketmonetarist.com/2011/10/28/milton-friedman-on-exchange-rate-policy-1/

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