Prebisch on Keynes and White's Plans*
White and Keynes at Bretton Woods
Prebisch realized that, in order to be useful, economics needed to include as some of its central features, those aspects that traditional theory had ignored such as a historical/institutional perspective. Further, he became more aware of the interrelation and interconnectivity between the different countries and regions, and in particular, in the asymmetric relationship between center and periphery and its corresponding and distinct role in the international division of labor. Prebisch’s first reference to center and periphery dates back to 1921, in his analysis of the differences in the colonization of the Río de la Plata and the United States. In other words, prior to the publication of the development Manifesto in 1949, Prebisch had developed a sophisticated conception of the process of historical development of capitalism. This allowed him to understand the problems of the international monetary system from the perspective of the relationship between the center and the periphery.
In 1944, after he left the Central Bank of Argentina, he published a review of Keynes and White's plans (here in Spanish; subscription required). Prebisch highly approved the countercyclical element in Keynes’s Clearing Union. He nonetheless expressed his reservations about the plan. This was due to the fact that, according to Prebisch the balances of the members of the Clearing Union were to be deposited in a single institution and these had the obligation to spend their balances on commercial transactions between themselves. As a result, it did not promote the creation of a balanced and equilibrated commercial system that would benefit in any way the countries of the periphery.
For Prebisch, Keynes’ plan suffered from the same flaws of the Gold Standard including, in particular, its automatism ‘that had so gravely hurt the universal Gold Standard.’ This automatism referred to the freedom of countries to use the credits granted within their respective quotas. Prebisch thought that this had an inherent inflationary bias and that this did not benefit the countries of the periphery.** Moreover, Prebisch believed in a directed system of credits and, thus, that these should be granted according to countries’ needs. All in all, in his final judgment on Keynes’s plan he asserted: “the very favorable [aspects] and other inconvenient aspects that are not difficult... to correct. This applies to the counter cyclical policy of Keynes’s plan, because if at the beginning of a depression countries have enough resources to equilibrate their balance of payments, they have no need to compress their imports and lead to a sharp contraction of their domestic economies.”
Notwithstanding his critical appraisal of Keynes’s proposal Prebisch reserved his harshest criticism for White’s plan. Prebisch argued that White’s plan was even less favorable to the periphery than that of Keynes. Moreover, in spite, of providing temporary relief to balance of payments disequilibrium, White’s plan ultimately contained a strong contractionary bias. This could have a strong and negative effect in the growth of output and employment in the countries of the periphery. And on this Prebisch was correct, as that was the eventual effect of the International Monetary Fund (IMF), which was mitigated for a while as a result of the Cold War and, in the case of Europe, by the Marshall Plan (in Japan and other geopolitical hotspots in Asia too assistance reversed the contractionary bias of the balance of payments adjustment process).
Prebisch proposed an alternative plan, a full employment plan in line with that of John H. Williams, Harvard professor (from a time before Excel; yes, meaning Reinhart and Rogoff) and advisor to the Fed (for his views go here; subscription required too; for critical analysis of Williams contributions go here). This consisted in that the governments of the countries belonging to the center (and in particular in the United States) compensate the fall in economic activity with increased public expenditure, including public works to sustain high levels of employment and output. This plan also contemplated directing the flow of credit to avoid unsustainable disequilibria. Even though Prebisch did not realize, his plan was consistent with Keynes' views regarding the need to sustain rather than abolishing expansions.
For Prebisch the benefits of a full employment plan were immensurable, yet, he was not overly optimistic that the more developed economies (i.e. the economies belonging to the center) would ever adopt full employment policies. This view point would endure as a crucial component of Prebisch’s thought even when he seemed, at the end of the 1940s, to shift his analysis towards the longer run problems of Latin America and the need to promote the industrialization of the periphery.
* Modified from the Spanish version of the paper linked here.
** Prebisch's views on inflation at this point were strictly conventional and based on the notion of forced savings (excess demand).