WASHINGTON (MNI) – The following is the fourth and final section of
the remarks of Federal Reserve Chairman Ben Bernanke prepared for
Friday’s Sixth European Central Bank Central Banking Conference in
Frankfurt:

In the near term, a shift of the international regime toward one in
which exchange rates respond flexibly to market forces is,
unfortunately, probably not practical for all economies. Some emerging
market economies do not have the infrastructure to support a fully
convertible, internationally traded currency and to allow unrestricted
capital flows. Moreover, the internal rebalancing associated with
exchange rate appreciation–that is, the shifting of resources and
productive capacity from production for external markets to production
for the domestic market–takes time.

That said, in the short term, rebalancing economic growth between
the advanced and emerging market economies should remain a common
objective, as a two-speed global recovery may not be sustainable.
Appropriately accommodative policies in the advanced economies help
rather hinder this process. But the rebalancing of growth would also be
facilitated if fast-growing countries, especially those with large
current account surpluses, would take action to reduce their surpluses,
while slow-growing countries, especially those with large current
account deficits, take parallel actions to reduce those deficits. Some
shift of demand from surplus to deficit countries, which could be
compensated for if necessary by actions to strengthen domestic demand in
the surplus countries, would accomplish two objectives. First, it would
be a down payment toward global rebalancing of trade and current
accounts, an essential outcome for long-run economic and financial
stability. Second, improving the trade balances of slow-growing
countries would help them grow more quickly, perhaps reducing the need
for accommodative policies in those countries while enhancing the
sustainability of the global recovery. Unfortunately, so long as
exchange rate adjustment is incomplete and global growth prospects are
markedly uneven, the problem of excessively strong capital inflows to
emerging markets may persist.

Conclusion

As currently constituted, the international monetary system has a
structural flaw: It lacks a mechanism, market based or otherwise, to
induce needed adjustments by surplus countries, which can result in
persistent imbalances. This problem is not new. For example, in the
somewhat different context of the gold standard in the period prior to
the Great Depression, the United States and France ran large current
account surpluses, accompanied by large inflows of gold. However, in
defiance of the so-called rules of the game of the international gold
standard, neither country allowed the higher gold reserves to feed
through to their domestic money supplies and price levels, with the
result that the real exchange rate in each country remained persistently
undervalued. These policies created deflationary pressures in deficit
countries that were losing gold, which helped bring on the Great
Depression. (3) The gold standard was meant to ensure economic and
financial stability, but failures of international coordination
undermined these very goals. Although the parallels are certainly far
from perfect, and I am certainly not predicting a new Depression, some
of the lessons from that grim period are applicable today. (4)

Thus, it would be desirable for the global community, over time, to
devise an international monetary system that more consistently aligns
the interests of individual In particular, for large, systemically
important countries with persistent current account surpluses, the
pursuit of export-led growth cannot ultimately succeed if the
implications of that strategy for global growth and stability are not
taken into account.

(3 See Ben S. Bernanke and Harold James (1991), “The Gold Standard,
Deflation, and Financial Crisis in the Great Depression: An
International Comparison,” in R. Glenn Hubbard, ed., Financial Markets
and Financial Crises, a National Bureau of Economic Research Project
Report (Chicago: University of Chicago Press); Barry Eichengreen (1992),
Golden Fetters: The Gold Standard and the Great Depression, 1919-1939
(New York: Oxford University Press); and Douglas A. Irwin (2010), “Did
France Cause the Great Depression?” manuscript, Dartmouth College and
National Bureau of Economic Research, September,
www.dartmouth.edu/~dirwin/Did%20France%20Cause%20the%20Great%20Depressio
n.pdf.)

(4 See Barry Eichengreen and Peter Temin (2010), “Fetters of Gold
and Paper,” NBER Working Paper Series 16202 (Cambridge, Mass.: National
Bureau of Economic Research, July), available at
www.nber.org/papers/w16202.pdf. countries with the interests of the
global economy as a whole. In particular, such a system would provide
more effective checks on the tendency for countries to run large and
persistent external imbalances, whether surpluses or deficits. Changes
to accomplish these goals will take considerable time, effort, and
coordination to implement. In the meantime, without such a system in
place, the countries of the world must recognize their collective
responsibility for bringing about the rebalancing required to preserve
global economic stability and prosperity. I hope that policymakers in
all countries can work together cooperatively to achieve a stronger,
more sustainable, and more balanced global economy.)

(4 of 4)

** Market News International Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$,MT$$$$,M$X$$$,M$A$$$,MI$$$$,M$Q$$$,MN$FX$]