John Tamny, editor of RealClearMarkets.com, has written an eloquent column in Forbes about the perverse affects of the floating dollar. One point he raises is that these affects undeservedly give free-market capitalism a bad name, when it is in fact the monetary system that produces them. Consider his example from the financial crisis:
Many decry the proliferation of derivatives, but the simple truth is that if they didn’t exist, a floating dollar means we would have to invent them. In what is effectively a dollarized world, as long as the money measure fluctuates in value, producers will have to hedge the price of everything given how little they can trust any commodity to hold its price over long periods. For those who doubt the floating dollar’s substantial role here, they need only ask why futures trading was so quiet prior to 1971, not to mention why the price of oil was flat right up to 1971.
Tamny’s central point is that unstable money distorts global capitalism because it retards the trust necessary to facilitate desirable transactions. Exchanges under floating currencies inevitably leave winners and losers based upon the value of money rather than the exchange itself. Currency fluctuations usually result in trade hostility (consider the U.S. vs. China), which saps growth. Tamny’s recommendation? Fixed exchange rates with money defined in terms of gold.
