Like OPEC, the producers of money - governments - are monopolists that control the output of money. The government monopolies that run the monetary printing presses indirectly determine the foreign exchange price of their currency by the monetary policy choices they make. Consequently, as long as governments maintain a monopoly on the production of money, floating exchange rates no more establish the correct (i.e., efficient) level of money production than floating oil prices determine the correct (i.e., efficient) level of oil production.
In both the cases of oil and money, the problem is easily rectified in theory: Break up the producers' cartel and government monopolies, dismantle state-owned oil enterprises and central banks, and allow private oil companies and private financial institutions to maximize profits by determining for themselves the proper level of production of oil and money respectively. The international oil and Forex auction markets, in which prices are freely set, will do the rest. In both cases, the appropriate role for government is the same: Define and maintain the unit by which both oil and money are measured - the definition of a "barrel" (159 liters) where oil is concerned and the definition of a "dollar" (a fixed gold weight) where money is concerned.
In practice, alas, neither theoretical solution is politically viable. In the case of money, however, there is a readily available second-best solution. If the U.S. government is going to retain the monopoly power to print money, it should enact into law objective criteria to control the printing press. The law should restrain government officials from devaluing the dollar when election and business cycles come into phase. It should also protect against the temptation to devalue the dollar indirectly by using diplomatic and economic leverage on other countries to coerce them into restricting the production of their own money, thereby deflating their currencies and increasing the foreign-exchange value of their currencies relative to the dollar.
In order to ensure a stable dollar of constant value (neither a "strong" nor a "weak" dollar), it has long been my view that the Fed should announce that it intends to maintain a fixed dollar-price of gold, or if gold is politically verboten, then announce that it will maintain a fixed dollar price of an index of price-sensitive commodities. Then the Fed can conduct monetary policy, i.e., buy and sell bonds, as required to hit that price target, and Forex markets will measure the relative stability and instability of other currencies through the price mechanism.
If the dollar is stable and other nations choose to maintain a stable currency of their own by calibrating their money-production activities to maintain a fixed foreign-exchange ratio of their currencies to the dollar, all the better for a thriving international economy. That is not currency manipulation; it is the ultimate in sound monetary policy.
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