I'm showing this diagram also because one of the things that Mundell ends the article with, he wrote this article in 1999 and its published in 2000 when he got the Nobel Prize. And it's sort of optimistic at the end if you've read it. He says, "Oh, look we've had this bad 20th century experience," and which I'm going to talk about today. But look, now we have these sort of stable units. We have the Euro, we have the Dollar, we have the Yen and we're on our way to maybe having an international monetary system and some stability. We still have volatility but maybe it's going to be better. And he's sort of hopeful at the end of the at the end of the article. And so we can see what happened since since 2000, that in fact there's still quite a bit of volatility. So there's the Yen here at the beginning of this period, and here's the Yen at the end of this period. This is very large fluctuation in value against the Dollar. And the same with the Euro. Here's the Euro here and the Euro at the end, there's fluctuation. I should warn you, this diagram we are quoting these two exchange rates in two different terms. The Euro as we did last time. This is just what comes out of this Fred site that I was showing you before. Maybe I'll show you on this side here, that the Euro is quoted here as US Dollars to one Euro. So if it takes more US Dollars to one Euro, that's appreciation of Euro. So if this goes up, that appreciation the Euro. If this goes down, that's appreciation of the yen. So these two, if there were no movement between the Yen and the Euro, these two lines should move exactly opposite to each other. Because of this quoting convention. And you can see sometimes they do sort of move opposite. There's that one there and there's that one there, but they're not equal and opposite. That's just a little bit of a move and that's a big move. So there's a lot of volatility not only between these major currencies and the Dollar but also between each other is the point too. So, we do not have a- where there's a lot of volatility and there's still no global currency, which is what he says at the end of this article in 2000. So 12 years later, we haven't moved on very far. And in fact as I'll come to at the end, we have a Euro crisis now, and some people wonder whether the Euro will even survive. In 1999 is when the Euro became the Euro, so that was a huge moment of hope for the future, and now it's in some crisis. And you will see also that as a consequence of the financial crisis is that there's been some retreat from financial globalization toward national capitalism. So things have retreated somewhat from the optimism of 2000. Doesn't mean that we won't get through it, maybe we will. We don't know. We'll see what the future holds. So let me just talk about this article. This is a fascinating article, A reconsideration of the 20th century. And I've had this article on the reading list for many years, but I hadn't read it in a while. And so when I was reading it in preparation for today, I realized there are some things about this article that I never quite fully took on board and noticed before. So I want to first draw your attention to that. And I'm going to translate this article into the language of the course, but in some ways, it's closer to the course than I had realized. It's clear that Mundell has a- he's thinking about the gold standard as being the good old days. The international gold standards of good old days. And why was it good old days? That's the point. It was the good old days because the payment system provided a kind of discipline for individual countries. That the need to make your international payments in gold was a good, thing. That it disciplined central banks and disciplined finance ministries as well. And that was a good thing for individual countries, the disciplining business. It was not only good for individual countries, but it created an integrated system of the whole world. Integration and stability because everyone is adjusting their own behavior to the same discipline. They're all facing the same discipline and as a consequence, the system as a whole has a certain unity to it. Now this didn't mean that there weren't problems, and there was actually some tendency to long deflation some time or because of the value of gold would change over time. But in retrospect, this is rather a positive feature of the system. This all broke down in World War 1, and we had this whole 20th century experience, which was quite different. And the story that he wants to tell in this article is that instead of submitting to the discipline, countries decided and central banks and finance ministers said, "This discipline is too harsh. And I don't want to submit to it. And so, I would like to get out from under in some way or the other." And, so central banks are avoiding discipline, are trying to avoid discipline. So let's just remind ourselves of our hierarchy. There's gold, there's currency, there's deposits. So it's this connection here, Gold and currency, this is where the discipline is. The central bank is issuing currency that's convertible into gold, and the central banks are trying to avoid that discipline. One way they could have done this. This is in the back of his mind throughout this article, is to revalue gold, because the discipline comes from the idea that as we're expanding, as the economy is expanding, currency expands but gold doesn't, and so it holds you back. But if you just increased the price of gold, higher value of gold is like more gold. So it's the same thing. There's more gold that way. So if you could coordinate and get all the central banks to just raise the price of gold, that would have, or in other words, devalue your currency against gold, that would be the same thing, you could have relaxed that discipline. But it has to be a coordinated thing. All countries have to do this at the same time. That's one way to avoid the discipline. But, but the countries were not able coordinate this amongst themselves because there were always distributional consequences of revaluing gold. Some countries had a lot of gold and other ones didn't, and so revaluing would be a wealth transfer. And that was always a problem and you couldn't sort out, well maybe the ones who gained could compensate the losers, you know this is just not the way international politics works. Another way you could have avoided the discipline was by creating artificial gold. So this is the quantity thing. Instead of just increasing the value of gold, increase the quantity of gold artificially. And there were some attempts to do that like with the SDR and the IMF, but again too little too late it didn't really quite, quite work. So the central banks are trying to avoid discipline. There are mechanisms that were always in the back of Mundell's minds that would have worked, but they weren't able to find them and they weren't able to get to them. And so as a consequence, we had a lot of bumbling around. And in particular, the main culprit in this bumbling, it's quite amazing the story he tells there, the main culprit in this is in fact the US Fed. That the US Fed is the central bank that's also trying to avoid discipline, but it also doesn't know what it's doing. It's a new central bank. It's created in 1913. It has no history, and it's constantly making errors. However the US is the dominant country, and so everyone is trying to peg to the Dollar and so whatever the Fed does is what the world does during this whole period. So that instead of having a gold standard, we had a Dollar standard in basically in the background and eventually in the foreground, Dollar standard but immature Fed. And the consequence was a lot of volatility until the whole system broke down. So there's the gold standard and then there's the Dollar standard, and then there's the floating rate period that led us to 1999, when he's thinking that's sort of coming to an end. You know, Europe has decided that it doesn't want to have floating rates among its currencies anymore, they're going to unify. And so it's just going to, he's projecting that into the future. There's going to be more and more unification. And it hasn't actually happened. So I think this hierarchy of money point of view is helpful. And notice that we're talking about the central bank and its relation to some international standard. Now I'm going to go through the article in a little more detail.
