WORLD: WHAT THE WORLD PAYS FOR FLOATING EXCHANGE RATES. - Why do governments 'accept the inevitability of a scenario that has led to such misery and destruction in the past'? Judy Shelton, of the Hoover Institution at Stanford University, here takes to a

Last Updated: 31 Aug 2010

Why do governments 'accept the inevitability of a scenario that has led to such misery and destruction in the past'? Judy Shelton, of the Hoover Institution at Stanford University, here takes to an extreme the case against an economic regime which business takes for granted: floating exchange rates. Even if you reject the apocalyptic view in her book title (Money Meltdown), floating rates are plainly a potent and potentially disruptive force.

Indeed, shifting exchange rates are far more important in determining competitive advantage (and profits) than any other factor. Witness the performance of US exports, up 121% since 1978 - with all the rise coming after the dollar's slide began in 1985. Economists attribute perhaps half the export surge to the dollar's relapse to 1978 levels against all currencies, the sharp fall against the yen being decisive.

Likewise, the Major devaluation, not the Thatcher rise in leanness and fitness, is what largely explains the boost in British exports and exporting profits. Yet leaders of British industry were mostly adamant supporters of the European Monetary System, and of the pound's overpriced position in the EMS. Did this apparently self-defeating attitude reflect a yearning for the stability lost when President Nixon abandoned the Bretton Woods system of fixed rates?

Swings in the currency markets continue to torment industrialists. A couple of months back Daimler-Benz, recovering from a $949 million loss, warned that a weak dollar - reducing the value of US sales - could dampen the profits rise expected in the second half-year. Analysts expected profits to double in 1995, but only in the absence of further depreciation of the dollar.

In sum, floating exchange rates are a serious inconvenience to all businesses. The complexities operate inside companies too. Do you hold managers responsible for results in local currencies, or in the reporting currency? In some cases, locals must meet reporting currency targets even if the exchange movement is adverse, but receive no credit if the trend is favourable. Heads they lose, tails they don't win. Adoption of a common European currency - still on the post-Maastricht agenda - would ease such problems, but only in Europe. So is a global return to Bretton Woods possible?

Not without participation by the US, and there this fundamental issue is brushed aside. MIT's professor Rudi Dornbusch is typical in arguing that Bretton Woods 'was never as idyllic as many would believe' - since currency crises and revaluations were fairly frequent. As for the present instability, Business Week's Dean Foust argues that its consequences are overstated, that 'the dollar's tumble against the yen is largely the result of the short-sighted trade policies of Japan, which refuses to shrink its huge world surplus'. Anyway, 'corporations somehow manage to raise capital through the sale of debt and equity'. That cuts no ice with Shelton: 'The real producers and consumers of the world can only be discouraged and disgusted by a game that is biased towards the shrewd practitioners of monetary artifice.' There's one large point in her favour. Since Bretton Woods collapsed, world economic expansion has been markedly lower, and the instability of major corporations markedly greater.

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