Fixed Rates Ballast Interest Rates and Commodity Prices

Originally published in the Wall Street Journal
May 3, 2016

In his letter of April 28 Prof. Robert Blohm concedes the main point of our April 20 op-ed “Monetary Reform or Trade War,” nothing that when it was suspended, the Bretton Woods gold-exchange system “was already unsustainable because of the ‘duplicating credit’ the authors mention.” He raises two important secondary points: first, that under the world paper dollar system, the price level in dollars is also affected by the total demand for dollars and for specific commodities (like crude oil) which are priced in dollars; and second, that under floating exchange rates, commodity price-swings in dollars induce destabilizing swings in exchange rates for non-reserve countries.

Though Prof. Blohm doesn’t seem to have tested the theory empirically, we can attest, having done so by forecasting for nearly three decades, that both secondary points are indeed helpful in forecasting commodity and financial asset prices, both in U.S. and foreign markets. But these secondary concerns make little practical difference in setting economic policy. As Prof. Blohm rightly notes, “commodity prices and interest rates were all boringly stable before President Nixon ended the gold-convertibility of the U.S. dollar.”

Lewis E. Lehrman
Greenwich, Conn.

John D. Mueller