martedì 26 giugno 2018

The Vatican and the International Monetary System

Speaker’s Corner
The Vatican and the International Monetary System
M.G. Hayes
Robinson College, University of Cambridge, Grange Road,
Cambridge CB3 9AN, UK
Published online: 10 Jan 2013.
This paper considers the Note issued by the Pontifical Council for Justice and Peace in 2011 calling for reform of the international financial and monetary systems. Three main themes are identified: (a) the inequality of global economic growth over the last century, (b) the failings of economic liberalism as a guide for the conduct of policy and (c) the need for a degree of transfer of sovereignty from individual states to the global level. This paper articulates the meaning of these themes in economic terms and illustrates the nature of the changes in thought and practice that the Note considers necessary in the interests of the common good.

Catholic Church, international monetary system, global governance,
financial transactions tax

The Pontifical Council for Justice and Peace has offered a reflection on the current economic and financial crisis (2011, hereafter “the Note”). I begin this piece with a short precis of the Note, with particular reference to the international monetary system, upon three principal themes: (a) the inequality of global economic growth over the last century, (b) the failings of so-called “economic liberalism” as a guide for the conduct of policy and (c) the need for a degree of transfer of sovereignty from individual states to the global level in order to make progress. I then articulate the meaning of these themes in economic terms and illustrate the nature of the changes in thought and practice that the Note considers necessary in the interests of achieving the common good.
The Pontifical Council writes that the Church is concerned with the common
good and therefore about the material resources necessary to achieve it. The last 60 years have seen unprecedented global economic growth but widening inequality within and between countries. The current crisis has its origins in the liberalisation of the financial system since the 1970s, culminating in the failure of Lehman, which led to the shattering of confidence and serious damage to the real economy, especially in the developing world.
The cause of this increasing inequality and of the crisis itself is an ideology of free markets and of opposition to appropriate regulation, particularly at the international level. Underpinning this ideology is a utilitarian philosophy and an individualist culture. One consequence is a technocratic, materialist outlook, which encourages the error that economic problems have merely technical solutions. The neglect of ethics and of social justice will lead to hostility and violence and threatens democracy. Successful policy will be based on an ethic of solidarity and the recognition that people are not commodities.
Pope John XXIII recognised in 1963 that an increasingly global society requires corresponding political structures in order to achieve the common good.
The progress of economic globalisation, together with concerns about security, human rights and the environment, has made more pressing the need for a renewed commitment to the reformation and extension of the scope of the United Nations in accordance with the principles of solidarity and subsidiarity. Although the road will be long and difficult, the world needs to set its course towards a global political Authority at the service of the common good.
In the sphere of economics and finance, two factors have been historically
decisive: the loss by the Bretton Woods institutions since 1971 of their central role in global governance and the deregulation of finance. There is a need to renew the vision that led to Bretton Woods and return to a system of managed exchange rates with a global central bank. The primacy over economics and finance of a politics, grounded in the spiritual and ethical, needs to be restored so that markets and financial institutions may come to serve the human person and the common good.
The building of the necessary consensus will take time and a higher education that recognises the ethical dimension.
Despite its immense productive potential, the modern world lacks solid ethical foundations and a sense of purpose. In the face of present uncertainties, we need vision and imagination to transform society for the better. Over the centuries, rival clans and kingdoms gave way to modern states, and in a similar fashion the common good of peoples increasingly unified by globalisation now requires, as a moral imperative, a gradual, balanced transfer of sovereignty to a world Authority.
It is striking that the Note singles out what it calls “economic liberalism” for
criticism. This term appears to refer not only to neoliberal ideology but also to mainstream economic analysis itself. The criticism is not only of its tendency to favour free markets and discourage regulation, but more deeply of its methodological distinction between positive (economics) and normative (ethics) and its philosophical roots in utilitarianism. A particular criticism is that liberal economic thought is a form of “a priorism” that derives its policy prescriptions from axiomatic principles without reference to reality, an essentially unscientific enterprise. The Church was equally critical of Marxist economic thought for this very reason, as set out by Leo XIII in Rerum Novarum and John Paul II in Sollicitudo Rei Socialis. It appears that Catholic thought on economic matters occupies quite distinct territory. Although both left and right have sought to appropriate them for their own policy agendas, the Church’s insights cannot be reduced to those terms. Commentators from the Catholic Right, more accustomed to the Church’s championing of the dignity and freedom of the human person, have greeted this latest Note with varying degrees of dismay.
The Note approaches economics at a meta-theoretical level, addressing the
principles upon which economic thought and policy should be based. People are to be treated not as commodities, but with the respect due to their intrinsic worth.
Social and economic problems cannot be addressed in purely technical terms (for example, “labour market flexibility”), without reference to ethics or culture.
In an echo of the ancient teaching on usury, the purpose of finance is to be
understood as the service of industry and not simply as the pursuit of profit
through the unbounded creation and trading of financial claims without reference to the proper needs of production, consumption and physical investment. The invisible hand cannot be relied upon to deliver the common good unaided.
Without prudence, temperance and charity in the form of solidarity, at all levels of society from the individual to the state, the market will often deliver unjust outcomes that undermine the fabric of democracy and ultimately threaten the existence of the market itself.
It is clear that the Church welcomes globalisation on the right terms. Economic growth is good insofar as it provides the material resources needed for human flourishing. The Note credits globalisation with the nearly fivefold increase in global income per capita between 1900 and 2000, while the world’s population increased almost fourfold. Nevertheless, these changes have been associated with increasing inequality both within and between countries. The Church finds this degree of inequality unjust and inconsistent with an authentic people-centred development. Citing the evidence of the International Monetary Fund (IMF), increasing inequality is held to be the consequence of an inadequately managed process of globalisation.
The Note finds as a further major failing of the process of globalisation, since the breakdown of the Bretton Woods system in 1971, the series of financial crises beginning with the 1973 oil crisis, through the developing country debt crises of the 1980s, together with the long series of currency and banking crises suffered by individual countries and regions but culminating in the 2008 global crisis.
These crises have caused hardship to untold millions. At the root of these crises, the Note identifies the uncontrolled growth of the financial sector consequent upon the liberalisation of capital movements between countries and the deregulation of the banking sector. In both cases, these reforms were justified by economic liberalism.
The Church’s message is at one level pragmatic. Multilateral cooperation has historically been good for growth, and both autarky and liberalisation much less so. Nevertheless, there were many development failures during the Bretton Woods era and the IMF system itself contained the seeds of its own destruction. It is not a question of going back to that particular regime but first of repudiating the doctrinaire rejection of such institutions by economic liberalism, itself often a thin veil for powerful vested interests. It is then necessary to consider why multilateral cooperation is so difficult and where the solutions may lie. This is where the Church’s positive vision and discernment can contribute.
As though the inequality of income and the hardships suffered by the poor in the crises produced by the current economic order were not a sufficient motive for reform, the Note points to the threat posed by them to the world as a whole.
Quoting Hobbes, who contrasts the solidarity between citizens with the enmity between their states, which “prey upon each other like wolves”, the Note warns that economic injustice creates a climate of growing hostility and violence and threatens to undermine democracy itself.
Although it is unlikely that many in authority are complacent about the current state of the world, the Note’s target is the assumption of economic liberalism that the solutions lie with the global extension of competitive markets, without a corresponding recognition of the need for stronger institutions at the international level and beyond that a change of heart that makes human dignity and the common good the underlying principles guiding the design of all institutions, including the social infrastructure of markets. The Note warns that economic liberalism may ultimately destroy the very freedom upon which it is based.
Why might world government of the monetary system be necessary and in the interests of the common good?
Economic liberalism advocates flexible exchange rates and the liberalisation of capital, goods and labour markets. Optimal currency areas are largely defined in terms of the territorial limits of the free movement of labour as well as political expediency; if prices and wages were fully flexible, national currencies would be irrelevant. From this perspective, there is nothing to warrant the transfer of national sovereignty to a global, or even regional, level and indeed the role of the state within the national economy should be kept to the minimum required for markets to function smoothly.
There is a shared recognition among economists of all schools that the trade
imbalances between countries are a matter of concern but sharply diverging
analyses as to why. Mainstream commentators tend to attribute trade imbalances either to profligacy (by the public or private sector) or to allegedly protectionist practices, such as the pegging of the Chinese currency to the US dollar at too low a value. The normal prescriptions of thrift and free markets follow. By contrast, Keynesian economists emphasise the importance of long-run demand patterns in determining trade balances, the need for adjustments beyond changes in exchange rates and the absence of an easy tendency to balance of payments equilibrium. Thus, the trade balance becomes a force in itself such that a trade deficit requires a corresponding deficit on the part of either the public or private sector. For example, in the case of Greece, its increasing trade deficit post-1999 was largely matched by government borrowing, whereas in Spain it was mainly offset by often speculative private capital flows into construction. In the
USA, it has been a mixture of both public and private deficits financing
Once the balance of payments is understood as a causal variable and indeed as a potential constraint on demand and economic growth, economists can no longer be indifferent to the form in which the trade deficit is financed. Private capital flows into a country only in the expectation that the inflow will be reversed over time by more than the initial amount to cover the investor’s profit. Therefore, it matters how the private inflows are invested and, in particular, they are only in the national interest if they can be expected to generate a surplus over the cost of capital, not simply in monetary terms, but in terms of net exports. This applies whether or not the country has its own currency or is part of a monetary union such as the Eurozone. In the absence of such investment opportunities, the country can
in the long run correct its balance of payments deficit not only by other, more direct methods of increasing net exports, including a reduction in the real exchange rate (whether by nominal devaluation or, much more difficult, by cuts in money wages), but also by industrial and trade policy, both of which are anathema to economic liberalism. There is an agreement that import restriction is generally to be regarded as a last resort because of its long-run implications for world trade and competitiveness, yet such measures, preferably on a multilateral basis, play a valid role when targeted against countries running persistent trade surpluses and thereby reducing global demand.
The Bretton Woods system was created in response to this Keynesian
understanding of the nature of the global market economy. Nevertheless, the flaws in that system demonstrate the need for government
super partes , beyond governance inter partes . The following three features stand out:
(a) The logic of the system required gradual exchange rate adjustments in line with changes in domestic price levels so as to maintain real exchange rates and, when necessary, change them in order to take account of changes in the economic fundamentals governing the balance of payments. In practice, the intellectual legacy of the gold standard and the national interests of member states made them reluctant either to devalue or to revalue, and the system became rigid and brittle. While the IMF had some power, in the form of access to finance, to persuade deficit countries to accept devaluation, it had no authority to impose it and a fortiori no means either to persuade or to compel surplus countries to accept a revaluation. Indeed, the original IMF articles reversed the onus and required IMF approval for exchange rate changes proposed by members in order to avoid the competitive devaluations of the 1930s.
(b) Apart from the IMF’s lack of authority to change the exchange rates, no
sanctions or financial penalties were imposed on countries in balance of
payments surplus. Although there was a “scarce currency clause” allowing
restrictions onimports from persistent surplus countries, this was never invoked.
Since the system as a whole had to balance, any tendency towards long-run
surplus among some members forced corresponding deficits on others. For many years, the USA was content to run a deficit in order to accommodate the surpluses of Germany, France and Japan, but this was unsustainable (the “Triffin dilemma”).
(c) The Bretton Woods system did not shake off the legacy of gold. As a gold
exchange standard, growth in international reserves required the issue of US dollars or sterling against an obligation to redeem in gold at a fixed parity. The US deficit could not continue indefinitely without the total liability exceeding the value of its gold reserves. After the devaluation of sterling in 1967, leading to the eventual suspension of gold convertibility by the USA in August 1971, the system was finished.

The Note calls for the creation of a world central bank as one condition of a stable international monetary regime. This would require addressing the major questions of the nature of the assets supporting the issue of a global reserve currency, the implications for the US dollar and other reserve currencies, and the implications for private capital flows. It seems likely that any new system would need to contain the following elements of government, as opposed to governance:
(a) A reformed IMF would need the authority and the economic capacity to fix exchange rates on a smoothly adjusting peg at the level it judged to be
consistent with long-run equilibrium of the balance of payments between
countries. This would be analogous to central bank independence at national level in fixing the interest rate.
(b) Exchange rates would be pegged in the first instance against a new global currency (working title, the mondeo) issued by the IMF and backed by a basket of (say) 30 commodities in proportion to their significance in world trade and other criteria. While some fiduciary element (i.e. loans to central banks denominated in mondeo) would be desirable, the commodity basket substitutes for the ability to impose taxation, which ultimately supports national fiat currencies. The use of commodities to back the mondeo would produce a negative return of up to 5% per annum, corresponding to the carrying costs of the physical goods. Although there might be ways of reducing this cost, notably by expanding the fiduciary element, it is the price of creating a reserve asset that is independent of the economic policies of any individual state, especially in relation to inflation, as under the gold standard.
The recovery of these costs might be a suitable application of a financial
transactions tax that would overcome some of the objections to such a
supranational tax. The historical role of gold reflected its low carrying costs.
(c) All foreign exchange reserves held by central banks would be converted to mondeos. This would be achieved by the issuing countries selling
commodities to the IMF for mondeos to purchase the existing reserves
(again a fiduciary element might be involved, at least as a transitional
measure). A large proportion of these commodities are already held in
strategic reserves so that it becomes a matter of transferring title. Any
shortfall would be met by production over a sufficient period (say five years),
incidentally providing an initial boost to global demand. The physical
distribution of commodities in warehouses across countries could over time
be adjusted to match approximately their holdings of mondeos in order to
provide security against political risk. Any aggregate surplus of mondeos
could be redeemed pro rata for commodities.
(d) Member states would need to accept measures to adjust their balance of
payments where the IMF judged that exchange rate adjustments would be
insufficient. This would apply to both surplus and deficit countries. In the
former case, the ultimate sanction might be compulsory loans (unremunerated and repayable only upon winding up) from the persistent surplus to multilateral development banks to finance productive, export-oriented investment in deficit countries. The negative return on mondeos would also help to discourage unnecessary reserve accumulation.
(e) The corollary of the negative return and the provisions for surplus country adjustment are an irrevocable undertaking that each central bank would accept only the mondeo or its own national currency in settlement of balances due from other central banks or the IMF. Gold and other currencies would not be accepted (i.e. they would become demonetised for the purposes of international official transactions). This would not prevent bilateral credits in the currency of the lender but by their nature such transactions would need to balance over time.
(f) Although conversion would deal with official reserves, private holdings of
foreign currency assets would remain. After 40 years of financial
liberalisation, these balances dwarf official reserves, and capital controls
would be necessary to maintain the currency pegs. Provided that the new
exchange rate regimes were seen to be sustainable, there would be little
reason for a run on a currency, given responsible national monetary and fiscal policies, since the path of future exchange rates would be largely predictable and interest and capital repayments could continue to be made in line with economic fundamentals (which indeed is the only way such payments can ever be made, in aggregate). Speculation on currencies would become both less possible and less necessary, and capital controls might be relaxed accordingly.

Thus, in summary, a world central bank would require the transfer of sovereignty, over exchange rates and over the imposition of adjustment on surplus countries, together with the acceptance by member states of a reserve currency with a negative return. Capital controls would remain a matter for member states and represent a reclaiming of sovereignty from financial markets by the state. The main benefit would be a system of stable exchange rates and a semi-automatic mechanism to ensure that trade imbalances do not depress global employment.
There would be a number of side effects of particular benefit to developing
countries, although these would not be the direct objective of the world central bank itself.
It is not difficult to see why such a system would require states to subordinate their immediate short-term interests for the benefit of the common good. The demonetisation and conversion of existing official exchange reserves would impose a loss of income relative to other assets and involve taxation in one form or another. Conversely, the requirement on issuers of existing reserve currencies to deliver commodities would represent a real transfer of resources and a cancellation of the seignorage previously earned. The USA in particular would lose the ability to borrow without limit from other central banks and become subject in certain respects to the IMF! Both the USA and the UK contain powerful
vested interests that would oppose capital controls. There are therefore formidable political obstacles to any such proposals.
The introduction of an element of global government into the international
monetary system along these lines would require a degree of political vision and
consensus that has rarely, if ever, been achieved, even in the aftermath of world
war. The value of the Note is that it offers hope and direction to a world lost in
confusion and misled by market ideology. It does not forecast that the world will
take this road, any more than that a benighted traveller will find a path through a swamp. The Note merely points out that, in the end, the only reliable solution is to drain the swamp.


Pontifical Council for Justice and Peace (2011) Towards Reforming the International Financial and Monetary Systems in the Context of Global Public Authority, Vatican City: Tipografia Vaticana.


Dr M. G. (Mark) Hayes is Fellow and Director of Studies in Economics at
Robinson College, Cambridge. He is an economist with research interests in
Keynes and in Fair Trade, with which he was formerly involved as a practitioner
for 15 years until 2002, and also had a previous career as an investment banker.

His primary research is on and related to Keynes’s General Theory, and he is Secretary of the Post Keynesian Economics Study Group (PKSG). His major book is
The Economics of Keynes: A New Guide to The General Theory
(Edward Elgar, 2006)

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