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Back to the Sixties

BERKELEY – Complaints about the inflationary effects of American monetary policy are rampant, despite there being barely a hint of inflation in the United States. Rapidly growing catch-up economies are paddling furiously to avoid being dragged down by a torrent of capital inflows. Prominent policymakers, desperate for alternatives to America’s malfunctioning monetary system, have gone so far as to allude to a return to the gold standard.

I am not talking about 2011, but about 1964. We have been here before.

In 1964, it was the rapidly growing economies of Europe, still catching up to the US, that were howling about the Federal Reserve. As a result of a recklessly expansionary American policy, they argued, they were being flooded with imported finance. The US was “exporting inflation.”

American officials countered that the financial inflows reflected Europe’s underdeveloped capital markets. Europe’s inflation problem was a byproduct of its central banks’ reluctance to tighten policy more aggressively, and European countries’ hesitancy to let their currencies rise, reflecting their long-standing commitment to export-led growth.