Devaluing the economic debate

As debate heightens around campus surrounding the special concentration in business management, a fierce debate has also resonated from the halls of central banks around the world. The latter debate—pertaining to an international “currency war”—has been cast largely in political terms: Nations have blamed other nations for greedily devaluing their currencies. Our Columbia debate has been largely pedagogical: Should students of a liberal arts institution be indoctrinated into the professional world of business? These debates are interrelated. We have yet to measure the political implications of the Columbia business concentration, and we have failed to evaluate the currency crisis in more abstract terms.

The introduction of the business concentration is an acceptance of the current economic system. The field of business, like economics, currently lacks the self-criticism needed to substantially reform global economic systems. By better preparing students for the business and financial worlds, we are essentially teaching them to accept the operations of those worlds, without questioning or evaluating their flaws.

But that’s not to say that the onus lies on Columbia’s economics and business faculty. The international community at large has categorically failed in three regards: 1) in properly analyzing the abandonment of the gold standard, 2) in assessing that decision’s effect on global currencies, and 3) in highlighting efforts to establish a new international reserve currency.

In 1944, Allied nations met in Bretton Woods, N.H. to establish a post-war economic order. Noting the unparalleled economic strength of the United States at this time, the delegates adopted a fixed currency exchange rate that pegged all foreign currencies to a reserve currency—the dollar. The dollar was given a fixed value in gold, $35 to an ounce. This meant that all nations pledged to keep their exchange rates in check by buying and selling dollars. This system was to ensure that nations would avoid export deficits, which occur when you import more than you export. The United States didn’t have to avoid export deficits since it hosted the reserve currency. It could pay itself out of debt by printing more dollars for foreign countries.

As the United States continued to print more dollars, the supply of gold in Fort Knox rapidly declined. By 1971, unable to grant gold to nations demanding it and facing severe inflation due to Vietnam spending, Nixon declared the end of gold convertibility—no more could nations exchange their dollar reserves for gold. In came profligate dollar printing and competitive devaluation.

Leaving the gold standard has allowed the U.S. to devalue the dollar by increasing the supply of money. This process allows the U.S. to get out of its trade deficit by reducing the price of U.S. products abroad and increasing the price of foreign products within the U.S. However, devaluation has had detrimental effects abroad and has instigated a currency war. U.S. devaluation has created a liquidity crisis in East Asian nations like Cambodia where the supply of American dollars within Cambodia exceeds that of the local currency. Since the Cambodian central bank can’t control the supply of U.S. dollars within its country, it faces an inflation crisis that’s out of its hands.

John Maynard Keynes, one of Bretton Wood’s protagonists, adamantly opposed using the dollar as the world’s reserve currency. He instead suggested creating a supranational currency called the Bancor that wouldn’t have to serve any national interests. Today, Russia and China have joined the ranks of several developing nations in calling upon a new, independent reserve currency à la Keynes’ Bancor. While the process of creating and monitoring this currency will certainly be difficult if not impossible, it is a process that should be discussed and properly covered in the media.

Solutions must also be sought at the college level, here at Columbia. We are taught to accept the post-1971 economic order as consummate. At Columbia, an introductory economics course highlights the 1944 Bretton Woods Conference as the beginning of the international economics. If mentioned, the decision in 1971 to abandon the gold standard is stated as a matter of fact and never one meriting deeper analysis.

The discourse surrounding our global currency system must be radically altered within the economics discipline. Our post-gold world should not be accepted as a definite matter of fact. The 1971 decision must be put up to debate. Most significantly, alternatives to our current system of non-backed dollar reserves must be taken into consideration.

At the end of the day, the debate surrounding Columbia’s business concentration is not about what constitutes a liberal arts education. It’s about using what a liberal arts education has taught us—to criticize, to question, to be curious—to achieve lasting success both in the classroom and in the global arena.

Rhonda Shafei is a Columbia College junior majoring in history. She is an executive board member of the Columbia International Relations Council and Association, and the secretary general of the Columbia Model United Nations Conference and Exposition 2011. The Politics of Hummus runs alternate Fridays.