Abstract

The International Inflation Mechanism and the Reform of the World Monetary System

In the past few years a worldwide tendency towards acceleration of the rate of inflation has been evident, coupled with an international levelling off of the rates of changein the value of money. This contribution attempts to substantiate the thesis that this phenomenon is attributable to marked monetary expansion on the basis of strong growth of international liquidity. It is shown that this relationship cannot be explained conclusively with the help of Keynesian foreign trade theory, since in monetary and fiscal policy and upward and downward revaluation the individual economies have instruments at their disposal with which they can extricate themselves from the worldwide inflation mechanism. Unlike the Keynesian efficiency analysis of foreign trade determinants, which is oriented to the income flows in the individual economies, the monetaristic interpretation regards the world economy - provided the national currencies are interlinked by fixed exchange rates - as a system in which the quantity of money, price level and interest rates are centrally determined: The quantity of money by the growth of international liquidity, prices and interest rates via international price relationships. In an individual economy, the demand for money, which is dependent on the development of incomes, always finds a corresponding supply of money through the international finance markets. The national central bank can determine, solely by the policy it adopts, what share the foreign-trade and domestic-trade components have in the central bank money that is created. From the monetaristic viewpoint, upward and downward revaluations are also measures which in themselves are capable in the short run of breaking the bonds of international price interdependence. Against this theoretical background, Section II discusses possibilities of eradicating the international inflation mechanism by a reform of the world monetary system. In this respect an unfavourable judgment is reached on the reform conception of the so-called “Committee of Twenty” in the IMF, which continues to adhere to fixed but adjustable parities. In comparison, flexible exchange rates seem a better solution, since they allow to the greatest possible extent for the diverging interests of the various countries with regard to attainment of the conflicting objectives of price stability and a high level of employment. True, they cannot prevent an inflation due to domestic economic causes, but they do eliminate foreign influences on the national price level and changes in that level.