Photo credit: epSos.de
When China’s central bank devalued its currency last week, it effectively flooded international markets with artificial price signals that are based on manipulation rather than on production efficiency or quality. This type of arbitrary government discretion over the value of money is symptomatic of a larger flaw in worldwide monetary trade, argues Judy Shelton, co-director of Atlas Network’s Sound Money Project, in a new analysis for The Hill.
“Ever since the Bretton Woods agreement from 1944 was ended in the early 1970s, we have had no rule-based system for aligning exchange rates among the world’s different currencies,” Shelton writes. “The Bretton Woods system required every participating nation to maintain a fixed exchange rate between its own currency and the U.S. dollar. The objective for safeguarding international monetary stability was to ensure that sliding exchange rates did not tilt the scales of price competition. Free trade was based on genuine value rather than monetary illusion. Capital flowed to productive investment opportunities rather than speculative financial instruments.”
Today, exchange rates between nations shift unpredictably as central banks flood the world with cheap credit, and money loses its utility as an effective tool for measuring economic value.
“It's time to restore sanity to international monetary relations — indeed, we need to reaffirm the morality of money itself,” Shelton concludes. “Currencies should not be used as weapons to undercut the honest efforts of workers in competing countries. It will take bold leadership and vision to restore the fundamental role of money as a meaningful unit of account and reliable store of value. Money is meant to provide a useful measuring tool for free enterprise — not to serve as an instrument of government policy.”
Shelton will be one of the scholars participating in the Jackson Hole Summit from Aug. 27–29, hosted by Atlas Network partner the American Principles Project. The conference will shadow the Federal Reserve’s yearly meeting and ask Fed Chair Janet Yellen to move the Fed back in the direction of a sound and moral monetary regime, where consistent rules are favored over arbitrary discretion. Money is a moral matter, and events like this will help our side win back the moral high ground.