Spain is now in recession. Greece is bracing for elections, as is France, which could unleash class warfare. Austerity, low growth rates, and debt stalk the continent. The place caught such a cold that even the United Kingdom is not immune, slipping now as it is into the double-dip of a downturn.
So many times since the crisis in Europe has unfolded over the past few years, the finger has been pointed at the currency—the euro. If only there were national currencies that could be printed on demand, debt service could be set on solid footing and crises could be resolved quickly, as long-term reforms took shape. Portugal, Ireland, Italy, Greece, Spain (the “PIGGS”) could have the operating room, given their own currencies, to see themselves through to recovery and sustainability without too much rough stuff in the interim.
Whatever the merits of this sort of argumentation—and these are not many—it obscures the real tragedy that has unfolded in this crisis regarding the euro. The crisis has made us forget (if we ever really knew to begin with) what role the euro was supposed to play in the international monetary system. What we are witnessing now as the euro appears to be entering its death throes is the passing of one of the greatest efforts in contemporary times to restore order to the world currency mess that we have been living with for pushing half a century.
Whispers of a European currency began in the 1960s, in the latter stages of the “Bretton Woods” era, when the United States was still guaranteeing that major currencies traded at a fixed rate of exchange to the dollar. The system had worked great for about twenty years, from the late 1940s on, given that the United States in turn also guaranteed its own exchange rate to gold, at $35 an ounce.
This changed in 1968, and again in 1971, when the U.S. informed the other nations that it would no longer be redeeming gold at that or any price. This was because the U.S. wanted “freedom” to print its currency without any gold constraint, a power that might be useful in case a recession came and unemployment had to be stifled.
What happened, of course, is that the U.S. printed so much money that the price level tripled in a little over a decade in the 1970s. And in a baffling development, unemployment only went up and up.
To the major countries whose currencies had been tied to the dollar, it all made for a rude turn of events. Now medium-sized West Germany, Japan, France, Britain and all the rest had to tolerate a massive global inflation because many important things (oil most notably) were priced in dollars. If only the United States could be prevailed upon to reestablish soundness to its currency—this was the plaint of the Europeans (and Japan) in the 1970s.
Failing that unlikely scenario, the Europeans hit on another idea, a beautiful idea, and one more redolent of compulsion. This was to establish a rival currency of global significance as great as the dollar’s. Now, if the dollar were overproduced, investors could just dump it en masse for the rival currency. Since the U.S. would be loath for that to happen, the U.S. would choose not to mismanage the dollar.
It was precisely this thing of beauty which came on the scene as the euro was introduced in the 1990s. Here in the Eurozone was a transactions area, in terms of GDP, population, and all the rest, equal in size to that of the United States, with a single currency. Woe be to the dollar should the U.S. overprint it—because there was a euro to bail out to.
This, again, was the theory, and the beginnings of the practice. There would be two major world currencies, each careful about the other’s competition so much that they both would be disinclined to devalue. There would, effectively, be a fixed rate of exchange between the dollar and the euro. The great bugbear of currency volatility which had been ruining the world economy in various ways since the 1970s would be slain. In a little while, the two currencies could jointly fix to gold again, and we’d be fully back to the good old days.
Except…the United States devalued anyway in the mid-2000s, causing an inordinate rush on the euro that overvalued eurozone assets. The European balance sheets became so untenable that there came a counter-rush into the dollar: the incredible sudden appreciation of the dollar in mid-2008 that nobody talks about anymore. The system that was supposed to bring about stability in the most important price in the world (the dollar-euro exchange rate) somehow was supervising whipsaws in that very price. People cashed out into gold and Treasuries, and the Great Recession is what we got.
The failure of the United States and Europe to stabilize their exchange rate, and to do so formally, in the aftermath of the euro’s launch in the late 1990s now must rank as the greatest missed opportunity of the international monetary system of the entire post-Bretton Woods era. What we need to fear now is a breakup of the euro into national currencies, a world in which the dollar will once again find no viable rival. At stake in the wrenching debates in Europe today therefore is not only that region’s future, but that of the entire world under the dominance of a mismanaged dollar.
Books on the topic discussed in this essay may be found in The Imaginative Conservative Bookstore. Originally published at Forbes.com the essay is reprinted here with gracious permission of Brian Domitrovic.