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By Root 1226 0

–World War II period was one of fixed exchange rates. Most Western countries, including France and Italy, had capital controls restricting the movement of currency in and out of their borders. The dollar was pegged to gold. But as global trade grew, fixed rates created frictions and inefficiencies and prevented capital from being put to its best use. Most Western countries removed controls during the 1970s and 1980s. The result: a vast and ever-growing supply of capital that could move freely from one place to the next. Today, when people think about globalization, they still think of it mostly in terms of the huge amount of cash—currency traders swap about $2 trillion a day—that sloshes around the globe, rewarding some countries and punishing others. It is globalization’s celestial mechanism for discipline. (That discipline didn’t extend to the money-shifters themselves. Those piles of money created their own problems, which we’ll get to in a moment.)

Along with freely floating money came another policy revolution: the spread of independent central banks and the taming of inflation. Hyperinflation is the worst economic malady that can befall a nation. It wipes out the value of money, savings, assets, and thus work. It is worse even than a deep recession. Hyperinflation robs you of what you have now (savings), whereas a recession robs you of what you might have had (higher standards of living if the economy had grown). That’s why hyperinflation has so often toppled governments and produced revolution. It was not the Great Depression that brought the Nazis to power in Germany but rather hyperinflation, which destroyed the middle class by making its savings worthless.

It is rare that one can look back at a war that was so decisively won. Starting with Paul Volcker in the United States during the early 1980s, central bankers waged war on inflation, wielding the blunt tools of monetary policy to keep the price of goods relatively stable. It’s hard to overstate the momentousness of this economic battle. Between 1854 and 1919 (the years immediately preceding the creation of the Federal Reserve, the institution responsible for keeping inflation in check), recessions struck once every four years and lasted nearly two full years when they came. In the two decades before 2008, the United States experienced eight years of uninterrupted growth between recessions, and the downturns, when they hit, lasted only eight months. This period of stability was a spoil of the decades-long assault on inflation.

The tactics honed in that war became one of America’s most successful exports. In the late 1980s, dozens of large, important countries were beset by hyperinflation. In Argentina it was at 3,500 percent, in Brazil 1,200 percent, and in Peru 2,500 percent. In the 1990s, one after the other of these developing countries moved soberly toward monetary and fiscal discipline. Some accepted the need to float their currencies; others linked their currencies to the euro or the dollar. By 2007, just twenty-three countries had an inflation rate higher than 10 percent, and only one—Zimbabwe—suffered from hyperinflation. (By 2009, even Zimbabwe had cured its bout with hyperinflation by giving up its own currency and relying on the South African rand and U.S. dollar for commerce.) This broad atmosphere of low inflation has been crucial to the political stability and good economic fortunes of the emerging nations.

Though the inevitable protesters at G-20 summits will say differently, none of this happened by coercion. Success stories like Japan and the “Asian tigers” (Hong Kong, Singapore, South Korea, and Taiwan) were persuasive examples of the benefits of free trade and smart economic governance. Governments from Vietnam to Colombia realized they couldn’t afford to miss out on the global race to prosperity. They adopted sound policies, lowering debt levels and eliminating distorting subsidies—not because Bob Rubin or a secretive cabal inside the World Trade Organization forced them to do so, but because they could see the benefits of moving in that