Home / Opinion / The genius of Robert Mundell

The economist Robert Mundell has always been a prescient and prophetic thinker. In the 1960s, he asked what would happen in a world of freely floating exchange rates and open capital markets, a world which did not at that time exist. When it came into being after the collapse of the Bretton Woods system in 1971, economists and policymakers looked to his writings to understand this brave new world.

In the 1960s, he also considered the pros and cons of an “optimum currency area", a concept that he invented. Again, economists and policymakers looked to his work to assess whether one or another common currency, the euro area in particular, qualified.

In the 1970s, Bob—as he has always been known to his friends and disciples—led other right-leaning economists to make the case for tax cuts and sound money as the right policy mix to lift the US out of the doldrums. Then president Ronald Reagan and Federal Reserve Board chairperson Paul Volcker obliged, and the US entered a heady quarter-century of rapid growth and low inflation.

In his combination of theoretical acuity and the enormous practical and policy relevance of his ideas, Mundell has few peers. Indeed, he has rightly been called the most important macroeconomist of the 20th century after John Maynard Keynes.

In addition, Mundell exhibited great foresight in creating an intellectual community at which like-minded friends—mostly, but not exclusively, economists and bankers, a mix of academic and private sector folk—could gather to discuss and debate economic and monetary policy issues of the day. He did this by convening and chairing the Santa Colomba Conference, which has met almost every summer at his Renaissance villa in the rolling hills near Monteriggioni in Tuscany since that fateful year of 1971.

Indeed, as economist Judy Shelton reminded conference members, the first meeting took place on 6 September 1971, just three weeks after then US president Richard Nixon’s treasury secretary, John Connally, closed the gold window, effectively killing the Bretton Woods system.

This year’s conference, just concluded, was titled “Central Banking and Global Monetary Disorder". Some of the liveliest discussion was around the theme of the final session, “Imperative for Global Monetary Reform". Those familiar with Mundell’s work and readers of this column will be aware that, with great precision and prescience, he correctly diagnosed the post-Bretton Woods world— hailed by its defenders as a utopian world of independent currencies tied together by floating exchange rates—as, in reality, a non-system. Excessive and destabilizing volatility in exchange rates and capital movements since 1971, punctuated by periodic crises, has validated this diagnosis.

It is one thing to decry the absence of a system and to point out the failings of the current non-system, and it is quite another to propose a realistic alternative. The outgoing governor of the Reserve Bank of India, Raghuram Rajan, has excelled at the former but not the latter. He has argued against what he calls “competitive monetary easing" by advanced economy central banks, which he sees as a new form of “beggar thy neighbour" competitive currency devaluation—an argument which will be familiar to many readers and with which I have expressed my sympathy.

But as Harvard economist and former senior US official Richard Cooper put it at the conference table, complaints like Rajan’s amount to little more than grumbling unless they are accompanied by a credible alternative policy proposal, on which he has been largely silent. And as I commented in the same discussion, Rajan’s implicit suggestion that the Fed ought to internalize the harmful impacts of the “spillovers" of its policies on emerging economies such as India is naïve and unrealistic at best.

More helpful would be to point out the potentially negative “spillbacks" on the US itself, but even these are unlikely to be of sufficiently great magnitude to make much difference to the Fed’s calculation of what is in the US national economic interest, which is its mandate.

To Bob’s credit, he has gone beyond criticizing the current non-system, which is not that difficult for a clever economist to do. He has taken the much more difficult step of exploring alternatives, a theme that I have explored in previous columns in this newspaper. In brief, any credible alternative boils down to some version of a recreation of a Bretton Woods type of system. A viable Mark Two is unlikely to involve the US dollar, tied to the price of gold, as the sole anchor of the system, which ended up being its Achilles heel.

In previous writings and speeches, Mundell has proposed incremental steps toward a global unit of account with the creation of large currency areas, each of which consists of an anchor currency and other currencies fixing to it—such as a dollar area, a euro area, and so forth. If these currency areas then find fix against each other—or, at a minimum, coordinate the actions of their respective central banks to create floors and ceilings to dampen currency fluctuations—the world would have moved a long way toward reducing the damaging volatility of our current non-system.

For as Bob has taught us, a global economy ultimately requires a global currency.

Every fortnight, In the Margins explores the intersection of economics, politics and public policy to help cast light on current affairs.

Comments are welcome at To read Vivek Dehejia’s previous columns, go to

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