Benign Neglect.

• Author: KINDLEBERGER, CHARLES P.
• Position: Brief Article

Benign neglect is one of those oxymorons, like Kenneth Galbraith's conventional wisdom, which is slipping into everyday vocabulary. Originally coined by Patrick Moynihan (I think) in the context of race relations, it has moved into economics to mean the polar opposite of "intense competition" particularly in the realm of national currencies. The late Susan Strange once referred to "the vulnerability of European exchange rates to U.S. policies -- and especially to American "indifference" -- what American's like to call `benign neglect.'" Secretary of the Treasury John Connally told the world that "the dollar is our currency, but it's your problem." That's neglect, and with an edge. Subsequently, Treasury secretaries George Shultz and James Baker relaxed and simmered down. This failed to last, however. When Paul Volcker raised interest rates in 1980 in his assault on inflation, capital flows pushed the dollar up to a point where notice had to be taken. At the Hotel Plaza in late 1985, it was agreed that multiple intervention would be ordered to push the dollar down again. But suffering overkill, the Louvre agreement was needed in February 1987 to halt the dollar's slide. By the 1990s, during Robert Rubin's tenure at Treasury, benign neglect returned.

A strong case for neglect can be made for a top currency, as Susan Strange called the dollar in the 1970s. Other currencies can be adjusted; the value of the leader is the reciprocal of the weighted average of the rest. The role of the leader is to promote steady monetary and fiscal policies and free trade, but to leave the exchange rate to the rest of the world. If currencies compete, moreover, intervention must not be carried out at cross purposes, like the French in 1926, the British in 1931, and the Americans in 1933.

The euro's entrance on January 1, 1999, introduced the possibility of currency competition. A new book, The Euro as Stabilizer in the International Economic System edited by Robert Mundell and Armand Clesse, gives an account of a December 1998 conference in Luxembourg which explored how the euro would get along with the dollar. In the first years following the 1992 Maastricht Treaty, analyses assumed countries outside the European Monetary...