aeaweb - Interview with Robert A. Mundell

Interview with Robert A. Mundell
Howard R. Vane and Chris Mulhearn

"...By the 1960s, with the system in trouble, some economists had begun to advocate flexible exchange rates, including such distinguished figures as Milton Friedman, James Meade, Harry Johnson, and Gottfried Haberler. The prime motivewas to give independence to monetary policy in the U.S. and Britain. After the system had broken down, we moved by default to flexible exchange rates. I’m not sure that we’ve learned the right lessons from that period. It is probably fair to say that the majority of people have bought the arguments that flexible exchange rates are a free market solution and better than any alternatives. I disagree with that. If flexible exchange rates have proved to be acceptable, it is only because countries have been able to rely upon a fairly stable dollar (and now the euro) as measuring rods for their own units of account. If there were no dominant economy in the world, flexible exchange rates would be an unmitigated disaster.
I regard flexible exchange rates as an expression of monetary nationalism. It is true that with a flexible exchange rate a country gets monetary independence. It is free to set its own inflation rate where it wants to. Thus, after the former Soviet Union countries shifted from communism to capitalism, they created their own currencies and, following the advice of the international institutions, adopted flexible exchange rates. This let them have whatever inflation their money-financed fiscal deficits produced, and without exception they had hyperinflation. Ten years after the transition, measured GDP was lower than it was under communism.
My own preference is for monetary internationalism, where we use an international monetary system for the benefit of the world economy. This equalizes the playing field between big and small, rich and poor countries. Even a small country can gain monetary stability by fixing its currency to a large stable neighbouring country. The world as we have it is biased against the small and poor countries. The United States does not feel any pressure to restore the fixed-exchange rate international monetary system because all of its massive internal trade and most of its external trade is conducted in terms of the dollar.
At the very time when the U.S. was pushing the world into flexible exchange rates, the civilized countries of Europe were moving in the opposite direction, by creating the European Monetary System (to replace the IMF) and moving toward fixed exchange rates, culminating in the apotheosis of fixed exchange rates, the   single currency called the euro. Other nations have seen what a great success this is for Europe and are imitating it in other regions of the world. The regions are trying to make up for the disaster created by the center..."

Source: http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.20.4.89

A sidenote: http://www.polyconomics.com/index.php?option=com_content&view=article&id=1005:mundell-on-global-currency&catid=58:ben-bernanke&Itemid=32