An overflow crowd packed Salomon 101 Tuesday afternoon to hear John Nash, the Princeton mathematician, Nobel laureate and subject of the film "A Beautiful Mind," present an unorthodox view of international monetary policy.
Nash's lecture, "Ideal Money and Asymptotically Ideal Money," centered on the connection between fluctuation in inflation and exchange rates and the perceived long-term value of money.
"Good money," he argued, is money that is expected to maintain its value over time. "Bad money" is expected to lose value over time, as under conditions of inflation.
The policy of inflation targeting, whereby central banks set monetary policy with the objective of stabilizing inflation at a particular rate, leads in the long run to what Nash called "asymptotically ideal money" - currency that, while not achieving perfect stability, becomes more stable over time.
Nash argued that the emphasis on stabilizing the value of currency should extend to the international level, where exchange rates represent currencies' value relative to each other. He proposed that international exchange rates be fixed by pegging the value of each currency to a standardized basket of commodities, called the "industrial consumption price index." Such a policy would curtail the ability of central banks to make monetary policy.
Nash came up with the idea of the industrial consumption price index a few years ago, he said in the question and answer period, though he said he has been considering the problem of monetary stability for some time.
After World War II, international exchange rates were fixed, with currencies' value first pegged to gold and later fixed at set ratios. That regime was abandoned in the early 1970s, when increasing inflation forced the United States to devalue the dollar. Nash said his system would be more stable and sustainable than the gold standard because exchange rates would not be seriously affected by fluctuations in any one commodity.
"If it's defined in terms of commodities, it would be something you could trust," he said.
Nash compared the function of the price index to that of the metric system: It would facilitate the easier transfer of money and goods by standardizing the unit of measurement.
Diversified baskets of goods are also used to minimize fluctuation in the price indices used to calculate domestic inflation and in measures of stock market performance such as the Dow Jones Industrial Average.
Nash responded with caution to the suggestion from an audience member that a system of currencies approaching perfect stability would ultimately produce a system with only one world currency.
"There's nothing wrong with it," Nash said. But he added, "In practice, I'm a little distrustful of the politicians at the level of the United Nations and elsewhere," who would be in charge of administering a world currency.
Nash framed his argument as a critique of Keynesian economic theory, which allows the use of inflationary monetary policy as a tool to stimulate the economy during times of recession. This acceptance of small increases of inflation, he said, can allow inflation to spiral in the long run.
Hovering over an overhead projector and speaking in a low and steady tone, Nash rarely departed from the prepared text of his often-complex lecture. He brushed off a question about the inspiration for his research, requesting that questions deal only with the topic of Tuesday's lecture.
Nash received the 1994 Nobel Prize in Economics for his application of game theory to economics and is best known for his study of equilibrium in non-cooperative games. Nash's life, including his early research and his struggle with paranoid schizophrenia, was the subject of the 2001 film "A Beautiful Mind," which won the Academy Award for best picture.
His lecture was the last in a yearlong interdisciplinary series on rationality and decision-making sponsored by the Wayland Collegium for Liberal Learning.