Remembrances of economist Robert A. Mundell, who died last week at the age of 88, have noted that one of his chief accomplishments was outlining, in the 1960s, the idea behind the euro, a currency which first came into being in the 1990s. It was as if this brilliant economist came up with a theory, and in time the public submitted to its wisdom and put this theory into practice. Theory and practice, the old Hegelian order of things. First the new idea care of deep thinkers, and then the adoption by the wider world of regular people on account of the theory’s luminosity—this is the way the world ought to be in the canons of intellectualism.
Bob Mundell was, however, no such economist, no such intellectual. It was specifically he, rare among thought leaders in academia, who felt that the best reforms well up primordially from society, only to be rationalized as good by theorists, who might offer after the fact a few judicious tweaks. I quote him in my new book, The Emergence of Arthur Laffer: The Foundations of Supply-Side Economics in Chicago and Washington, 1966-1976. This was Mundell beholding the fixed-exchange-rate, gold-standard international monetary system in 1965:
“During this period the dollar standard, or the gold-dollar exchange standard, or the gold-dollar-sterling exchange standard—however we want to characterize it—has served the needs of prosperity and trade admirably. Although it is not beyond the ingenuity of economists to invent a more elegant system, the one we have has worked much better than its reputation and would suffice for the future provided it worked no worse than it has in the past. Who would complain if the world economy in the next 15 years were as prosperous as the last 15?”
As I note similarly of Mundell’s good friend on the faculty of the University of Chicago in the 1960s, Laffer himself, “paper after paper of his showed how fixed exchange rates and convertibility in gold—those fossils of the nineteenth century—were readily delivering postwar prosperity, with no natural end in sight.”
But as I also had to observe of Mundell’s innocent question about who would complain if the conditions of 1965 were to persist: the advocates of a new intellectualized monetary system would complain. Those who condescended to the gold standard would complain. As polls tell us today, about every single economist in an academic chair laughs at the gold standard, regardless of popular sentiment to the contrary. Sure enough, in 1971, the United States ended the gold standard, and soon after fixed exchange rates, to the approbation of the community of economist-intellectuals. On came flexible exchange rates, a system (“non-system” as Mundell sneered) outlined interminably in the economics journals in the 1950s and 1960s.
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“But a funny thing happened on the way to this flexible-rate nirvana,” as economist Marina von Neumann Whitman observed several years in, in 1975. The “world of managed flexibility has produced surprises undreamed of in the analyses of the 1950s and 1960s.” Surprises indeed. Stagflation in particular, the impossible duplicity of high unemployment and high inflation. In 1975, unemployment soared to 9 percent as inflation had its second year sampling the double digits.
In the book, I suggest that the academic-intellectual movement of the 1960s and early 1970s to overthrow the monetary system of the ages, the remnants of the classical gold standard, in favor of expert-advanced flexible rates ranks as “surely one of the worst in the history of the academic-policy nexus.” It is incredible that the intellectuals sneer at the gold standard. When the advice from these very people was taken as of 1971, the result was the 1970s.
In beginning to advocate for a common currency area in Europe, Mundell did so explicitly in terms of staving off the dominance of a non-gold-defined dollar. If, he made clear, the United States was not going to defend the gold standard, France in particular would strive to reestablish the gold standard against the wishes of the United States. If this effort (of 1967-68) failed, as it did, then Europe would try to opt for a currency that could provide an alternative to the dollar—as a second and less desired alternative to a classical monetary standard.
Mundell long maintained that the euro-dollar rate should be fixed, respectful of the fixed exchange rates under gold that had supervised the industrial revolution responsible for making these places so rich in the first place. Mundell was no “defunct scribbler,” the intellectual personage in Keynes’s writing who sets out the parameters of future public debate. Mundell preferred wisdom to well up from the public, intellectuals stepping in to ratify such wisdom and work up the system that the democratic populace desires to function in practice. Mundell advocated a common currency in Europe. But he lamented the cashiering of gold and fixed rates as the unfortunate development that led to that alternative.