The Conflict Between Free Trade And Capital Mobility

Over the past four decades, nations across the world have experimented with freer and freer global trade.  They floated their currencies, removed capital controls, and created the World Trade Organization.

The results have often been far from pretty, unfortunately.   Dozens of nations have wrestled with damaging bubbles, foreign exchange speculation, and capital flows that ultimately bring down their economies.  The benefits of free trade have only sporadically appeared, while growing imbalances increasingly threaten the whole system.

An Impossible Trifecta: Capital Mobility, Balanced Trade, and Floating Currencies

History seems to demonstrate an impossible trifecta.  You can have floating currencies and balanced trade, floating currencies and capital mobility, but you cannot have all three at once.

The Gold Standard was an attempt to solve this problem, by combining fixed currencies with capital mobility and balanced trade.  It came very close to success, but ultimately collapsed from relying on economic depressions as balancing mechanisms.  Similar solutions exist, but require far too much coordination.

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