Forex: The Bloc Proposal

An almost infinite variety of exchange rate systems are possible between the extremes of completely fixed rates--- and completely flexible rates.

The gold standard, which is very close to the complete fixity extreme, and completely free rates; the other extreme of unlimited, unmanaged flexibility, have been discussed.

Of those possible arrangements along the continuum of increasing flexibility in exchange rates, two systems have gained a number of adherents and deserve some consideration.

The first, which is otherwise called as 'bloc flexibility' involves fixed exchange rates between countries within a particular grouping, but flexible rates are used between the several groups in the world.

The second, the 'band' proposal involves flexible exchange rates within wider limits than the one percent on each side of parity allowed by the present system but not yet wholly free or unlimited in range.

The currency groupings or bloc flexibility proposal is a combination of fixed and flexible exchange rates based on geographical divisions.

The rationale of currency blocs is relatively simple. By keeping fixed rates of exchange between the currencies of countries which are the major trading partners of each other, the problem of the risk of exchange rate change is minimized.

In addition, countries with close economic ties will find it less difficult to coordinate economic policies with each other--- which they may already be doing anyway--- and thus the cost in that area is minimized.

By letting the exchange rate between one bloc's (primary) currency and others' fluctuate, basic differences in economic developments will not be allowed to cause balance of payments problems between blocs.

In effect, we would have fluctuating exchange rates, but based on much more rational groupings than existing national boundaries.

If this type of flexible exchange rates were to be adopted, three major 'blocs' or 'areas' would seem likely to evolve. That the Western Hemisphere would remain tied to the dollar can hardly be doubted.

Likewise, Continental Europe would probably become one currency area with which ex-colonies in Africa and Asia would align themselves.

Whether the British would join the dollar or European currency area, or go it alone with the sterling area is open to question.

This type of organization leaves room, so to speak, for the later incorporation of an Eastern European, Russian, or some future bloc into the world system of trade and monetary arrangements.

For the period since 1958, this system would have been extremely helpful. The dollar and the pound would have been extremely helpful.

The dollar and the pound would have tended to depreciate vis-a-vis a European currency unit, making the rather distasteful policy actions in England and the United States unnecessary or considerably less extreme.

This proposal has some appeal in that its parallels actual political developments in the world, rather than trying to impose on political realities some ideal arrangement designed to solve only its monetary problems.

 

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