Saturday, September 22, 2012

Heterodox Central Bankers: Robert Triffin

Robert Triffin (c. 1940)

Robert Triffin (of Triffin Dilemma fame) worked for the Federal Reserve in the 1940s, after his PhD at Harvard and before joining the IMF. He became the most prominent 'American' (he was Belgian born, in fact) money doctor of the 1940s, participating in missions to the Dominican Republic, Guatemala and Paraguay [other US money doctors in this period were Arthur Bloomfield, Bray Hammond, Henry Wallich, and John Williams; a list of missions available here at the end of the file]. Contrary to the Kemmerer missions of the 1920s and 1930s, or the British missions by Sir Otto Niemeyer of the same period, which advised on the creation of independent central banks strictly adhereing to the Gold Standard rules, the new Fed missions were quite heterodox.

In his National Central Banking and the International Economy, Triffin suggests that peripheral countries (agricultural in his terminology) were victims of the fluctuation of their terms of trade. He says:
"for most agricultural countries, large export receipts and favorable balances of payments usually coincide with high and not with low levels of domestic and export prices. The reason for this is that their ex- port volume and export prices fluctuate as much with demand as with supply conditions, if not more. That is, they are largely determined by international rather than domestic factors. Major fluctuations in export values result primarily from cyclical movements in economic activity and income in the buying countries, and not from changes in the relationship of domestic price or cost levels to prices and costs in other competing or buying countries. Thus, for many agricultural and raw material countries, the international cycle is mainly an imported product."
Crisis in the center dominated and caused crisis in the periphery. The global cycle, very similar to Raúl Prebisch's description of the nature of the crisis in the periphery at that time, implied that the automatic forces of the Gold Standard imposed deflationary adjustment that only made things worse. In Triffin's view, was to intervene in financial markets with exchange controls and promote expansionary policies in a recession. In his words:
"Capital tended to flow toward them in times of prosperity and away from them in times of depression, irrespective of their discount policy. The effect of such fluctuations in capital movements was to smooth down cyclical monetary and credit fluctuations in the creditor countries, but to accentuate them in the debtor countries. To that extent the finan- cial centers could shift part of the burden of readjustment upon the weaker countries in the world economy. Their only mechanism of defense was the policy consistently followed by the Central Bank of Argentina in the recent past with such remarkable success: to offset external drains from or accretions to its reserves through domestic policies of expansion or con- traction."
Note that the head of the Central Bank of Argentina at the time was Prebisch. By the time this study was published Triffin was at the International Monetary Fund.

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