Monetary Sovereignty as Globalization's Achilles' Heel

It is remarkable how the world’s short recent history of floating exchange rates among fiat currencies has affected popular thinking about what is eternally normal and proper in the economic system. Recently, Senators Charles Schumer and Lindsey Graham (2006) wrote matter of factly in the Wall Street Journal that “One of the fundamental tenets of free trade is that currencies should float. ” Such a “tenet, ” if it were such, could only have emerged since the 1970s. Of course, exchange rates had fluctuated widely in previous centuries, but it has been only since the 1970s that such fluctuations have been taken as connatural with the international monetary regime. Even John Maynard Keynes, the arch slayer of the last remnants of commodity money, was an adamant supporter of fixed exchange rates. 1 Before the 1970s, it was generally taken for granted that international transactions would be best served by a system of fixed exchange rates relative to the international standard of value, which was a commodity or a claim on a commodity. Money accepted across borders had generally been gold, or claims on gold, for about 2,500 years. The post-1971 international monetary “system, ” certainly a misnomer, is comprised of 150-some-odd currencies, primarily national, all circulating in the form of irredeemable IOUs, or IOUs redeemable only in other IOUs. Some trade freely against others, some trade freely but with governments buying and selling so as to maintain a desired price, and some are subject to exchange restrictions by their government issuers. This would appear a recipe for continual global chaos, but it functions with far more stability than one might expect, given the complete absence of agreed rules or an agreed international