Back to Fixed Exchange Rates: Another "New Economic Order"

This file is a short, single-author polemical essay/chapter on international monetary policy. Rothbard’s scope is the path from the classical gold-coin standard through interwar gold exchange, Bretton Woods, the Smithsonian Agreement, and the 1987 Group of Seven/Baker plan. His thesis is that governments repeatedly seek new economic orders that preserve inflationary discretion while avoiding monetary crisis; without genuine gold money, fixed exchange rates become arbitrary political prices.

Hold on to your hats: the world has now embarked on yet another “new economic order”—which means another disaster in the making.

Rothbard’s opening sentence sets the essay’s historical rhythm: each new order is a renewed attempt to replace gold’s discipline with coordinated state control. His core conceptual move is to separate a real gold standard from reserve-currency systems that use gold language while allowing inflation. The interwar sterling-centered order and Bretton Woods are treated as parallel pseudo-gold systems: currencies pyramid on pounds or dollars, and the reserve currency is itself only weakly tied to gold. The promised gain is cheap money and growing government spending without visible breakdown.

In short, governments have tried to square the circle, or, to have their pleasant inflationary cake without “eating” it by suffering decidedly unpleasant consequences.

The Bretton Woods collapse is explained through overvaluation, redemption pressure, and Gresham’s Law. As the United States inflated and foreign central banks accumulated dollars, gold at $35 an ounce became undervalued and dollars overvalued. Western European governments then demanded gold for their dollars, exposing that the system’s convertibility promise could not be honored.

Since the U.S. was not able to redeem its gold obligations, President Nixon went off the Bretton Woods standard, which had come to its inevitable demise, in 1971.

Rothbard does not romanticize the post-1971 floating fiat order. In his view, the absence of a world money leaves each nation free to inflate and creates exchange-rate uncertainty on top of ordinary price uncertainty. But this diagnosis makes him more hostile, not less, to fixed fiat rates. Floating rates at least move with supply and demand; fixed rates without gold depend on officials deciding what currencies ought to be worth. Economists err by treating purchasing-power parity, a long-run tendency, as a rule for correcting market prices, whereas exchange rates also embody expectations, interest-rate differences, taxes, capital movements, and fear of confiscation or inflation.

Once again, the market proves wiser than economists.

The immediate target is the 1987 G7 effort to stop the dollar’s fall. Rothbard argues that the dollar had been high because foreigners had willingly held dollar assets and financed American imports; when that willingness faded, depreciation was the market’s equilibrating response. To prop up the dollar, other governments had to buy dollars with their own currencies, a policy he considers temporary and crisis-prone, especially because West Germany and Japan resisted further monetary inflation. James Baker’s proposed formal system of fixed rates intensifies the problem. Its gold component—a secret commodity-price index that includes gold by formula—is, for Rothbard, camouflage: a token appeal to pro-gold opinion without redemption, coin, or monetary discipline.

I do not often agree with J.K. Galbraith, but he is certainly on the mark when he calls this new secret index a "marvelous exercise in fantasy and obfuscation."

The essay also reads the proposal as a political alliance. Conservative Keynesians desire a new Bretton Woods pointing toward a world paper unit and world central bank; supply-siders such as Robert Mundell and Jack Kemp welcome coordinated cheap money under a gold-colored cover; monetarist defenders of floating rates have lost influence in the Reagan administration. Rothbard’s relevance lies in this fusion of monetary theory and institutional suspicion: he sees international monetary orders not as neutral technical fixes but as coalitions for managed inflation. The Smithsonian Agreement, which survived only about eighteen months, supplies the warning precedent. His final comparison is stark: floating fiat rates are bad because gold has been abandoned, but fixed fiat rates are worse because they add international price-fixing to fiat money.

Unfortunately, the only thing worse than fluctuating exchange rates is fixed exchange rates based on fiat money and international coordination.