Foreign Affairs: End of National Currency


Richard Moore

Original source URL:

The End of National Currency
By Benn Steil
From Foreign Affairs, May/June 2007

Summary: Global financial instability has sparked a surge in "monetary 
nationalism" -- the idea that countries must make and control their own 
currencies. But globalization and monetary nationalism are a dangerous 
combination, a cause of financial crises and geopolitical tension. The world 
needs to abandon unwanted currencies, replacing them with dollars, euros, and 
multinational currencies as yet unborn.

Benn Steil is Director of International Economics at the Council on Foreign 
Relations and a co-author of Financial Statecraft.


Capital flows have become globalization's Achilles' heel. Over the past 25 
years, devastating currency crises have hit countries across Latin America and 
Asia, as well as countries just beyond the borders of western Europe -- most 
notably Russia and Turkey. Even such an impeccably credentialed 
pro-globalization economist as U.S. Federal Reserve Governor Frederic Mishkin 
has acknowledged that "opening up the financial system to foreign capital flows 
has led to some disastrous financial crises causing great pain, suffering, and 
even violence."

The economics profession has failed to offer anything resembling a coherent and 
compelling response to currency crises. International Monetary Fund (IMF) 
analysts have, over the past two decades, endorsed a wide variety of national 
exchange-rate and monetary policy regimes that have subsequently collapsed in 
failure. They have fingered numerous culprits, from loose fiscal policy and poor
bank regulation to bad industrial policy and official corruption. The 
financial-crisis literature has yielded policy recommendations so exquisitely 
hedged and widely contradicted as to be practically useless.

Antiglobalization economists have turned the problem on its head by absolving 
governments (except the one in Washington) and instead blaming crises on markets
and their institutional supporters, such as the IMF -- "dictatorships of 
international finance," in the words of the Nobel laureate Joseph Stiglitz. 
"Countries are effectively told that if they don't follow certain conditions, 
the capital markets or the IMF will refuse to lend them money," writes Stiglitz.
"They are basically forced to give up part of their sovereignty."

Is this right? Are markets failing, and will restoring lost sovereignty to 
governments put an end to financial instability? This is a dangerous 
misdiagnosis. In fact, capital flows became destabilizing only after countries 
began asserting "sovereignty" over money -- detaching it from gold or anything 
else considered real wealth. Moreover, even if the march of globalization is not
inevitable, the world economy and the international financial system have 
evolved in such a way that there is no longer a viable model for economic 
development outside of them.

The right course is not to return to a mythical past of monetary sovereignty, 
with governments controlling local interest and exchange rates in blissful 
ignorance of the rest of the world. Governments must let go of the fatal notion 
that nationhood requires them to make and control the money used in their 
territory. National currencies and global markets simply do not mix; together 
they make a deadly brew of currency crises and geopolitical tension and create 
ready pretexts for damaging protectionism. In order to globalize safely, 
countries should abandon monetary nationalism and abolish unwanted currencies, 
the source of much of today's instability.


Capital flows were enormous, even by contemporary standards, during the last 
great period of "globalization," from the late nineteenth century to the 
outbreak of World War I. Currency crises occurred during this period, but they 
were generally shallow and short-lived. That is because money was then -- as it 
has been throughout most of the world and most of human history -- gold, or at 
least a credible claim on gold. Funds flowed quickly back to crisis countries 
because of confidence that the gold link would be restored. At the time, 
monetary nationalism was considered a sign of backwardness, adherence to a 
universally acknowledged standard of value a mark of civilization. Those nations
that adhered most reliably (such as Australia, Canada, and the United States) 
were rewarded with the lowest international borrowing rates. Those that adhered 
the least (such as Argentina, Brazil, and Chile) were punished with the highest.

This bond was fatally severed during the period between World War I and World 
War II. Most economists in the 1930s and 1940s considered it obvious that 
capital flows would become destabilizing with the end of reliably fixed exchange
rates. Friedrich Hayek noted in a 1937 lecture that under a credible 
gold-standard regime, "short-term capital movements will on the whole tend to 
relieve the strain set up by the original cause of a temporarily adverse balance
of payments. If exchanges, however, are variable, the capital movements will 
tend to work in the same direction as the original cause and thereby to 
intensify it" -- as they do today.

The belief that globalization required hard money, something foreigners would 
willingly hold, was widespread. The French economist Charles Rist observed that 
"while the theorizers are trying to persuade the public and the various 
governments that a minimum quantity of gold ... would suffice to maintain 
monetary confidence, and that anyhow paper currency, even fiat currency, would 
amply meet all needs, the public in all countries is busily hoarding all the 
national currencies which are supposed to be convertible into gold." This view 
was hardly limited to free marketeers. As notable a critic of the gold standard 
and global capitalism as Karl Polanyi took it as obvious that monetary 
nationalism was incompatible with globalization. Focusing on the United 
Kingdom's interest in growing world trade in the nineteenth century, he argued 
that "nothing else but commodity money could serve this end for the obvious 
reason that token money, whether bank or fiat, cannot circulate on foreign 
soil." Yet what Polanyi considered nonsensical -- global trade in goods, 
services, and capital intermediated by intrinsically worthless national paper 
(or "fiat") monies -- is exactly how globalization is advancing, ever so 
fitfully, today.

The political mythology associating the creation and control of money with 
national sovereignty finds its economic counterpart in the metamorphosis of the 
famous theory of "optimum currency areas" (OCA). Fathered in 1961 by Robert 
Mundell, a Nobel Prize-winning economist who has long been a prolific advocate 
of shrinking the number of national currencies, it became over the subsequent 
decades a quasi-scientific foundation for monetary nationalism.

Mundell, like most macroeconomists of the early 1960s, had a now largely 
discredited postwar Keynesian mindset that put great faith in the ability of 
policymakers to fine-tune national demand in the face of what economists call 
"shocks" to supply and demand. His seminal article, "A Theory of Optimum 
Currency Areas," asks the question, "What is the appropriate domain of the 
currency area?" "It might seem at first that the question is purely academic," 
he observes, "since it hardly appears within the realm of political feasibility 
that national currencies would ever be abandoned in favor of any other 

Mundell goes on to argue for flexible exchange rates between regions of the 
world, each with its own multinational currency, rather than between nations. 
The economics profession, however, latched on to Mundell's analysis of the 
merits of flexible exchange rates in dealing with economic shocks affecting 
different "regions or countries" differently; they saw it as a rationale for 
treating existing nations as natural currency areas. Monetary nationalism 
thereby acquired a rational scientific mooring. And from then on, much of the 
mainstream economics profession came to see deviations from "one nation, one 
currency" as misguided, at least in the absence of prior political integration.

The link between money and nationhood having been established by economists 
(much in the way that Aristotle and Jesus were reconciled by medieval 
scholastics), governments adopted OCA theory as the primary intellectual defense
of monetary nationalism. Brazilian central bankers have even defended the 
country's monetary independence by publicly appealing to OCA theory -- against 
Mundell himself, who spoke out on the economic damage that sky-high interest 
rates (the result of maintaining unstable national monies that no one wants to 
hold) impose on Latin American countries. Indeed, much of Latin America has 
already experienced "spontaneous dollarization": despite restrictions in many 
countries, U.S. dollars represent over 50 percent of bank deposits. (In Uruguay,
the figure is 90 percent, reflecting the appeal of Uruguay's lack of currency 
restrictions and its famed bank secrecy.) This increasingly global phenomenon of
people rejecting national monies as a store of wealth has no place in OCA 


Just a few decades ago, vital foreign investment in developing countries was 
driven by two main motivations: to extract raw materials for export and to gain 
access to local markets heavily protected against competition from imports. 
Attracting the first kind of investment was simple for countries endowed with 
the right natural resources. (Companies readily went into war zones to extract 
oil, for example.) Governments pulled in the second kind of investment by 
erecting tariff and other barriers to competition so as to compensate foreigners
for an otherwise unappealing business climate. Foreign investors brought money 
and know-how in return for monopolies in the domestic market.

This cozy scenario was undermined by the advent of globalization. Trade 
liberalization has opened up most developing countries to imports (in return for
export access to developed countries), and huge declines in the costs of 
communication and transport have revolutionized the economics of global 
production and distribution. Accordingly, the reasons for foreign companies to 
invest in developing countries have changed. The desire to extract commodities 
remains, but companies generally no longer need to invest for the sake of 
gaining access to domestic markets. It is generally not necessary today to 
produce in a country in order to sell in it (except in large economies such as 
Brazil and China).

At the same time, globalization has produced a compelling new reason to invest 
in developing countries: to take advantage of lower production costs by 
integrating local facilities into global chains of production and distribution. 
Now that markets are global rather than local, countries compete with others for
investment, and the factors defining an attractive investment climate have 
changed dramatically. Countries can no longer attract investors by protecting 
them against competition; now, since protection increases the prices of goods 
that foreign investors need as production inputs, it actually reduces global 

In a globalizing economy, monetary stability and access to sophisticated 
financial services are essential components of an attractive local investment 
climate. And in this regard, developing countries are especially poorly 

Traditionally, governments in the developing world exercised strict control over
interest rates, loan maturities, and even the beneficiaries of credit -- all of 
which required severing financial and monetary links with the rest of the world 
and tightly controlling international capital flows. As a result, such flows 
occurred mainly to settle trade imbalances or fund direct investments, and local
financial systems remained weak and underdeveloped. But growth today depends 
more and more on investment decisions funded and funneled through the global 
financial system. (Borrowing in low-cost yen to finance investments in Europe 
while hedging against the yen's rise on a U.S. futures exchange is no longer 
exotic.) Thus, unrestricted and efficient access to this global system -- rather
than the ability of governments to manipulate parochial monetary policies -- has
become essential for future economic development.

But because foreigners are often unwilling to hold the currencies of developing 
countries, those countries' local financial systems end up being largely 
isolated from the global system. Their interest rates tend to be much higher 
than those in the international markets and their lending operations extremely 
short -- not longer than a few months in most cases. As a result, many 
developing countries are dependent on U.S. dollars for long-term credit. This is
what makes capital flows, however necessary, dangerous: in a developing country,
both locals and foreigners will sell off the local currency en masse at the 
earliest whiff of devaluation, since devaluation makes it more difficult for the
country to pay its foreign debts -- hence the dangerous instability of today's 
international financial system.

Although OCA theory accounts for none of these problems, they are grave 
obstacles to development in the context of advancing globalization. Monetary 
nationalism in developing countries operates against the grain of the process --
and thus makes future financial problems even more likely.


Why has the problem of serial currency crises become so severe in recent 
decades? It is only since 1971, when President Richard Nixon formally untethered
the dollar from gold, that monies flowing around the globe have ceased to be 
claims on anything real. All the world's currencies are now pure manifestations 
of sovereignty conjured by governments. And the vast majority of such monies are
unwanted: people are unwilling to hold them as wealth, something that will buy 
in the future at least what it did in the past. Governments can force their 
citizens to hold national money by requiring its use in transactions with the 
state, but foreigners, who are not thus compelled, will choose not to do so. And
in a world in which people will only willingly hold dollars (and a handful of 
other currencies) in lieu of gold money, the mythology tying money to 
sovereignty is a costly and sometimes dangerous one. Monetary nationalism is 
simply incompatible with globalization. It has always been, even if this has 
only become apparent since the 1970s, when all the world's governments rendered 
their currencies intrinsically worthless.

Yet, perversely as a matter of both monetary logic and history, the most notable
economist critical of globalization, Stiglitz, has argued passionately for 
monetary nationalism as the remedy for the economic chaos caused by currency 
crises. When millions of people, locals and foreigners, are selling a national 
currency for fear of an impending default, the Stiglitz solution is for the 
issuing government to simply decouple from the world: drop interest rates, 
devalue, close off financial flows, and stiff the lenders. It is precisely this 
thinking, a throwback to the isolationism of the 1930s, that is at the root of 
the cycle of crisis that has infected modern globalization.

Argentina has become the poster child for monetary nationalists -- those who 
believe that every country should have its own paper currency and not waste 
resources hoarding gold or hard-currency reserves. Monetary nationalists 
advocate capital controls to avoid entanglement with foreign creditors. But they
cannot stop there. As Hayek emphasized in his 1937 lecture, "exchange control 
designed to prevent effectively the outflow of capital would really have to 
involve a complete control of foreign trade," since capital movements are 
triggered by changes in the terms of credit on exports and imports.

Indeed, this is precisely the path that Argentina has followed since 2002, when 
the government abandoned its currency board, which tried to fix the peso to the 
dollar without the dollars necessary to do so. Since writing off $80 billion 
worth of its debts (75 percent in nominal terms), the Argentine government has 
been resorting to ever more intrusive means in order to prevent its citizens 
from protecting what remains of their savings and buying from or selling to 
foreigners. The country has gone straight back to the statist model of economic 
control that has failed Latin America repeatedly over generations. The 
government has steadily piled on more and more onerous capital and domestic 
price controls, export taxes, export bans, and limits on citizens' access to 
foreign currency. Annual inflation has nevertheless risen to about 20 percent, 
prompting the government to make ham-fisted efforts to manipulate the official 
price data. The economy has become ominously dependent on soybean production, 
which surged in the wake of price controls and export bans on cattle, taking the
country back to the pre-globalization model of reliance on a single commodity 
export for hard-currency earnings. Despite many years of robust postcrisis 
economic recovery, GDP is still, in constant U.S. dollars, 26 percent below its 
peak in 1998, and the country's long-term economic future looks as fragile as 

When currency crises hit, countries need dollars to pay off creditors. That is 
when their governments turn to the IMF, the most demonized institutional face of
globalization. The IMF has been attacked by Stiglitz and others for violating 
"sovereign rights" in imposing conditions in return for loans. Yet the sort of 
compromises on policy autonomy that sovereign borrowers strike today with the 
IMF were in the past struck directly with foreign governments. And in the 
nineteenth century, these compromises cut far more deeply into national 

Historically, throughout the Balkans and Latin America, sovereign borrowers 
subjected themselves to considerable foreign control, at times enduring what 
were considered to be egregious blows to independence. Following its recognition
as a state in 1832, Greece spent the rest of the century under varying degrees 
of foreign creditor control; on the heels of a default on its 1832 obligations, 
the country had its entire finances placed under French administration. In order
to return to the international markets after 1878, the country had to precommit 
specific revenues from customs and state monopolies to debt repayment. An 1887 
loan gave its creditors the power to create a company that would supervise the 
revenues committed to repayment. After a disastrous war with Turkey over Crete 
in 1897, Greece was obliged to accept a control commission, comprised entirely 
of representatives of the major powers, that had absolute power over the sources
of revenue necessary to fund its war debt. Greece's experience was mirrored in 
Bulgaria, Serbia, the Ottoman Empire, Egypt, and, of course, Argentina.

There is, in short, no age of monetary sovereignty to return to. Countries have 
always borrowed, and when offered the choice between paying high interest rates 
to compensate for default risk (which was typical during the Renaissance) and 
paying lower interest rates in return for sacrificing some autonomy over their 
ability to default (which was typical in the nineteenth century), they have 
commonly chosen the latter. As for the notion that the IMF today possesses some 
extraordinary power over the exchange-rate policies of borrowing countries, 
this, too, is historically inaccurate. Adherence to the nineteenth-century gold 
standard, with the Bank of England at the helm of the system, severely 
restricted national monetary autonomy, yet governments voluntarily subjected 
themselves to it precisely because it meant cheaper capital and greater trade 


For a large, diversified economy like that of the United States, fluctuating 
exchange rates are the economic equivalent of a minor toothache. They require 
fillings from time to time -- in the form of corporate financial hedging and 
active global supply management -- but never any major surgery. There are two 
reasons for this. First, much of what Americans buy from abroad can, when import
prices rise, quickly and cheaply be replaced by domestic production, and much of
what they sell abroad can, when export prices fall, be diverted to the domestic 
market. Second, foreigners are happy to hold U.S. dollars as wealth.

This is not so for smaller and less advanced economies. They depend on imports 
for growth, and often for sheer survival, yet cannot pay for them without 
dollars. What can they do? Reclaim the sovereignty they have allegedly lost to 
the IMF and international markets by replacing the unwanted national currency 
with dollars (as Ecuador and El Salvador did half a decade ago) or euros (as 
Bosnia, Kosovo, and Montenegro did) and thereby end currency crises for good. 
Ecuador is the shining example of the benefits of dollarization: a country in 
constant political turmoil has been a bastion of economic stability, with 
steady, robust economic growth and the lowest inflation rate in Latin America. 
No wonder its new leftist president, Rafael Correa, was obliged to ditch his 
de-dollarization campaign in order to win over the electorate. Contrast Ecuador 
with the Dominican Republic, which suffered a devastating currency crisis in 
2004 -- a needless crisis, as 85 percent of its trade is conducted with the 
United States (a figure comparable to the percentage of a typical U.S. state's 
trade with other U.S. states).

It is often argued that dollarization is only feasible for small countries. No 
doubt, smallness makes for a simpler transition. But even Brazil's economy is 
less than half the size of California's, and the U.S. Federal Reserve could 
accommodate the increased demand for dollars painlessly (and profitably) without
in any way sacrificing its commitment to U.S. domestic price stability. An 
enlightened U.S. government would actually make it politically easier and less 
costly for more countries to adopt the dollar by rebating the seigniorage 
profits it earns when people hold more dollars. (To get dollars, dollarizing 
countries give the Federal Reserve interest-bearing assets, such as Treasury 
bonds, which the United States would otherwise have to pay interest on.) The 
International Monetary Stability Act of 2000 would have made such rebates 
official U.S. policy, but the legislation died in Congress, unsupported by a 
Clinton administration that feared it would look like a new foreign-aid program.

Polanyi was wrong when he claimed that because people would never accept foreign
fiat money, fiat money could never support foreign trade. The dollar has emerged
as just such a global money. This phenomenon was actually foreseen by the 
brilliant German philosopher and sociologist Georg Simmel in 1900. He surmised:

"Expanding economic relations eventually produce in the enlarged, and finally 
international, circle the same features that originally characterized only 
closed groups; economic and legal conditions overcome the spatial separation 
more and more, and they come to operate just as reliably, precisely and 
predictably over a great distance as they did previously in local communities. 
To the extent that this happens, the pledge, that is the intrinsic value of the 
money, can be reduced. ... Even though we are still far from having a close and 
reliable relationship within or between nations, the trend is undoubtedly in 
that direction."

But the dollar's privileged status as today's global money is not 
heaven-bestowed. The dollar is ultimately just another money supported only by 
faith that others will willingly accept it in the future in return for the same 
sort of valuable things it bought in the past. This puts a great burden on the 
institutions of the U.S. government to validate that faith. And those 
institutions, unfortunately, are failing to shoulder that burden. Reckless U.S. 
fiscal policy is undermining the dollar's position even as the currency's role 
as a global money is expanding.

Four decades ago, the renowned French economist Jacques Rueff, writing just a 
few years before the collapse of the Bretton Woods dollar-based gold-exchange 
standard, argued that the system "attains such a degree of absurdity that no 
human brain having the power to reason can defend it." The precariousness of the
dollar's position today is similar. The United States can run a chronic 
balance-of-payments deficit and never feel the effects. Dollars sent abroad 
immediately come home in the form of loans, as dollars are of no use abroad. "If
I had an agreement with my tailor that whatever money I pay him he returns to me
the very same day as a loan," Rueff explained by way of analogy, "I would have 
no objection at all to ordering more suits from him."

With the U.S. current account deficit running at an enormous 6.6 percent of GDP 
(about $2 billion a day must be imported to sustain it), the United States is in
the fortunate position of the suit buyer with a Chinese tailor who 
instantaneously returns his payments in the form of loans -- generally, in the 
U.S. case, as purchases of U.S. Treasury bonds. The current account deficit is 
partially fueled by the budget deficit (a dollar more of the latter yields about
20-50 cents more of the former), which will soar in the next decade in the 
absence of reforms to curtail federal "entitlement" spending on medical care and
retirement benefits for a longer-living population. The United States -- and, 
indeed, its Chinese tailor -- must therefore be concerned with the 
sustainability of what Rueff called an "absurdity." In the absence of long-term 
fiscal prudence, the United States risks undermining the faith foreigners have 
placed in its management of the dollar -- that is, their belief that the U.S. 
government can continue to sustain low inflation without having to resort to 
growth-crushing interest-rate hikes as a means of ensuring continued high 
capital inflows.


It is widely assumed that the natural alternative to the dollar as a global 
currency is the euro. Faith in the euro's endurance, however, is still fragile 
-- undermined by the same fiscal concerns that afflict the dollar but with the 
added angst stemming from concerns about the temptations faced by Italy and 
others to return to monetary nationalism. But there is another alternative, the 
world's most enduring form of money: gold.

It must be stressed that a well-managed fiat money system has considerable 
advantages over a commodity-based one, not least of which that it does not waste
valuable resources. There is little to commend in digging up gold in South 
Africa just to bury it again in Fort Knox. The question is how long such a 
well-managed fiat system can endure in the United States. The historical record 
of national monies, going back over 2,500 years, is by and large awful.

At the turn of the twentieth century -- the height of the gold standard -- 
Simmel commented, "Although money with no intrinsic value would be the best 
means of exchange in an ideal social order, until that point is reached the most
satisfactory form of money may be that which is bound to a material substance." 
Today, with money no longer bound to any material substance, it is worth asking 
whether the world even approximates the "ideal social order" that could sustain 
a fiat dollar as the foundation of the global financial system. There is no way 
effectively to insure against the unwinding of global imbalances should China, 
with over a trillion dollars of reserves, and other countries with dollar-rich 
central banks come to fear the unbearable lightness of their holdings.

So what about gold? A revived gold standard is out of the question. In the 
nineteenth century, governments spent less than ten percent of national income 
in a given year. Today, they routinely spend half or more, and so they would 
never subordinate spending to the stringent requirements of sustaining a 
commodity-based monetary system. But private gold banks already exist, allowing 
account holders to make international payments in the form of shares in actual 
gold bars. Although clearly a niche business at present, gold banking has grown 
dramatically in recent years, in tandem with the dollar's decline. A new 
gold-based international monetary system surely sounds far-fetched. But so, in 
1900, did a monetary system without gold. Modern technology makes a revival of 
gold money, through private gold banks, possible even without government 


Virtually every major argument recently leveled against globalization has been 
leveled against markets generally (and, in turn, debunked) for hundreds of 
years. But the argument against capital flows in a world with 150 fluctuating 
national fiat monies is fundamentally different. It is highly compelling -- so 
much so that even globalization's staunchest supporters treat capital flows as 
an exception, a matter to be intellectually quarantined until effective crisis 
inoculations can be developed. But the notion that capital flows are inherently 
destabilizing is logically and historically false. The lessons of gold-based 
globalization in the nineteenth century simply must be relearned. Just as the 
prodigious daily capital flows between New York and California, two of the 
world's 12 largest economies, are so uneventful that no one even notices them, 
capital flows between countries sharing a single currency, such as the dollar or
the euro, attract not the slightest attention from even the most passionate 
antiglobalization activists.

Countries whose currencies remain unwanted by foreigners will continue to 
experiment with crisis-prevention policies, imposing capital controls and 
building up war chests of dollar reserves. Few will repeat Argentina's misguided
efforts to fix a dollar exchange rate without the dollars to do so. If these 
policies keep the IMF bored for a few more years, they will be for the good.

But the world can do better. Since economic development outside the process of 
globalization is no longer possible, countries should abandon monetary 
nationalism. Governments should replace national currencies with the dollar or 
the euro or, in the case of Asia, collaborate to produce a new multinational 
currency over a comparably large and economically diversified area.

Europeans used to say that being a country required having a national airline, a
stock exchange, and a currency. Today, no European country is any worse off 
without them. Even grumpy Italy has benefited enormously from the lower interest
rates and permanent end to lira speculation that accompanied its adoption of the
euro. A future pan-Asian currency, managed according to the same principle of 
targeting low and stable inflation, would represent the most promising way for 
China to fully liberalize its financial and capital markets without fear of 
damaging renminbi speculation (the Chinese economy is only the size of 
California's and Florida's combined). Most of the world's smaller and poorer 
countries would clearly be best off unilaterally adopting the dollar or the 
euro, which would enable their safe and rapid integration into global financial 
markets. Latin American countries should dollarize; eastern European countries 
and Turkey, euroize. Broadly speaking, this prescription follows from relative 
trade flows, but there are exceptions; Argentina, for example, does more 
eurozone than U.S. trade, but Argentines think and save in dollars.

Of course, dollarizing countries must give up independent monetary policy as a 
tool of government macroeconomic management. But since the Holy Grail of 
monetary policy is to get interest rates down to the lowest level consistent 
with low and stable inflation, an argument against dollarization on this ground 
is, for most of the world, frivolous. How many Latin American countries can cut 
interest rates below those in the United States? The average inflation-adjusted 
lending rate in Latin America is about 20 percent. One must therefore ask what 
possible boon to the national economy developing-country central banks can hope 
to achieve from the ability to guide nominal local rates up and down on a 
discretionary basis. It is like choosing a Hyundai with manual transmission over
a Lexus with automatic: the former gives the driver more control but at the cost
of inferior performance under any condition.

As for the United States, it needs to perpetuate the sound money policies of 
former Federal Reserve Chairs Paul Volcker and Alan Greenspan and return to 
long-term fiscal discipline. This is the only sure way to keep the United 
States' foreign tailors, with their massive and growing holdings of dollar debt,
feeling wealthy and secure. It is the market that made the dollar into global 
money -- and what the market giveth, the market can taketh away. If the tailors 
balk and the dollar fails, the market may privatize money on its own. is copyright 2002--2006 by the Council on Foreign 
Relations. All rights reserved.

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