Money Mischief_ Episodes in Monetary History - Milton Friedman [93]
In 1987, Britain followed the example of Chile and Israel for a few months when the then chancellor of the exchequer, Nigel Lawson, tried to peg the pound to the West German mark at three marks to the pound, at a time when the pound was tending to appreciate relative to the mark. The result was a sharp rise in monetary growth that brought the attempt to an untimely end and left a legacy of inflation and high interest rates.
Britain tried again in 1990, when it decided to join the EMS, in effect pegging its currency to the German mark, though with a broad range of ±6 percent around the designated central value. Britain's inflation rate was high when it joined the EMS—around 13 percent—compared with the rates of Germany, France, Japan, and the United States, though far lower than the rate prevailing in Israel when it adopted its monetary reform program. Britain was animated by the same motive in joining the EMS as Chile and Israel had been in pegging their currencies to the U.S. dollar—to give greater credibility to an announced anti-inflation policy. As in the latter two cases, the outcome in Britain is likely to depend on the future behavior of the currency to which it has pegged its own currency. If the mark were to behave as the U.S. dollar did after 1985, the British, like the Israelis, might regard the move as a great success. However, given the past behavior of the mark, such an outcome seems highly unlikely—though it cannot be ruled out, in view of the heavy fiscal burden Germany has assumed to promote the revival of the former East German territory. If, on the other hand, Germany continues to keep inflation low and the mark remains strong vis-a-vis other major currencies, the British are more likely to suffer the fate of Chile, in a milder form. Milder because there is little chance that the mark will appreciate against the dollar and the yen to anything like the extent that the dollar appreciated against the mark, the pound, and the yen from 1980 to 1985. However, if even a mild appreciation of the mark occurs, I conjecture that Britain will drop the peg or will adopt a new central rate.
There is much talk of establishing a single currency for the Common Market. Current proposals call for a staged movement toward an ultimate unified currency and a single central bank. The intermediate stages would retain separate central banks to administer pegged rates.
A truly unified currency makes a great deal of sense. But to achieve it where it doesn't exist—as in Europe today—requires the elimination of all central banks, if the unified currency is a pure commodity currency, or of all except one, if the unified currency is a fiat or partly fiat currency.
In Europe, the obvious choice for a single central bank would be the Bundesbank, which has been the dominant bank in the EMS. But that would require either the elimination of the Bank of England, the Bank of France, the Bank of Italy, and so on or their conversion into administrative branches of the Bundesbank. A possible alternative is the Bank for International Settlements, which would require the elimination of the Bundesbank as well. It is hard to regard any of these possibilities as serious options.
It seems to me an utter mirage to hope that a system of national central banks linked by pegged and managed exchange rates can prove a way station to a truly unified currency. It will be no easier to abolish the central banks after such a system is in operation than before it starts. And the prospect of a consortium of central banks operating as a unit, mimicking a single central bank,