Kalecki's alternative to Keynes and White and its consequences

Partial video (my fault) of the conference about the book edited by the late Jerzy Osiatynski and by Jan Toporowski published by Oxford University Press. Our chapter on Prebisch with Esteban Pérez is available in a preliminary version here.

Kalecki's Alternative to Keynes and White's Plans its Consequences

 

Webinar on Kalecki and his views on the Bretton Woods agreement. To register go here.

The End of Bretton Woods

  

End of Bretton Woods with Barry Eichengreen, myself and Lilia Costabile, organized by L-P. Rochon and the Review of Political Economy.

Nixon ends dollar convertibility

50 years ago this Sunday. A debate with Barry Eichengreen on that today at 1pm NY time, and you can register here.

My paper can be read here.

The Consolidation of Dollar Hegemony after the Collapse of Bretton Woods: Bringing power back in

Collapse, ma non troppo!

New IDEAS Working Paper on the alternative views of the collapse of Bretton Woods. From the abstract:

Contrary to conventional views which suggest that the collapse of Bretton Woods represented the beginning of the end of the global hegemonic position of the dollar, the collapse of the system liberated American policy from convertibility to gold, and imposed a global fiat system still dominated by the floating dollar. The end of Bretton Woods and the set of regulations that imposed capital controls were part of the agenda of many powerful groups within the US, and led to the creation of a more dollarized world. The challenge to the dollar might arise, eventually, from the decline in the United States’power to determine the pricing of key commodities in global markets; but it is premature to think about the demise of the dollar. The limitations of the dominant views about Bretton Woods are ultimately tied to mainstream economics.

Read it here.

The Demise of Bretton Woods

ROPE will be hosting a special Zoom Webinar, hosted by Lilia Costabile. The webinar is on August 13, 2021, at 1 pm, NY time (Bretton Wood collapsed on August 15, 1971) . To register, please use the following link.

Prebisch’s Critique of Bretton Woods Plans

Prebisch, Williams and Kalecki

New Working Paper with Esteban Pérez at the networkideas. From the abstract:

The name and work of Raúl Prebisch are often associated with the problem of long-term economic development in Latin America. Less well known and explored is Prebisch’s contribution to the study of the monetary and financial problems of the countries of the periphery in relation to those of the center. Prebisch analyzed the post-WW-II monetary plans of John Maynard Keynes and Harry Dexter White from the perspective of their compatibility with his national autonomous monetary policy proposal. He thought that both plans had important shortcomings that would prevent the achievement of their intended objective, international equilibrium in the balance-of-payments. The plans ignored the differences in the levels of development between center and periphery. These differences implied that economic and monetary phenomena could not be viewed through the same lens and that all countries could not be subject to the same norms in monetary policy. Prebisch’s concerns were shared by John H. Williams and also, by Michal Kalecki.

Encyclopedia of Central Banking

So LP Rochon has edited this Encyclopedia, with Sergio Rossi.

LP sent me the entry on Bretton Woods Regime, by Omar Hamouda, as a teaser.

"Bretton Woods is a location, period of history, beginning of an era in the twentieth century, birth of an international organization, but, most of all, an international monetary system to regulate trade, peg currencies to one standard, and maintain a regime of fixed exchange- rate parity.

In July 1944 at Bretton Woods, New Hampshire, 44 nations under official British and American leadership set up economic measures for post- war reconstruction. The US dollar – pegged to gold – was approved as the new monetary standard. Two new insti tutions were also established with specific tasks: the Stabilization Fund (International Monetary Fund, IMF), a “special organization” (Horsefield, 1969, p. 39), to be a watchdog facilitating and promoting trade through monetary stabilization, and the International Bank for Reconstruction and Development (World Bank), with the role of providing member nations with “necessary capital not otherwise available except possibly on too costly terms” (ibid.)."

Read rest here.

Triffin Dilemma and the collapse of Bretton Woods

Harry Dexter White and Keynes at Bretton Woods

I had promised to post on this a while ago. According to Triffin Dilemma view the US economy could not guarantee the convertibility of dollars into gold at the fixed parity, since the supply of gold did not keep pace with the increase in the level of income in the world economy. The U.S., on the other hand, provided liquidity to the world economy, increasing the supply of dollars, to avoid creating a liquidity problem. So the ratio of dollars to gold was not fixed, and the parity was unsustainable. The excess supply of dollars caused, in this view, a confidence crisis. The Bretton Woods system failed because the fixed parity commitment was not credible, in the context of an expanding economy.

For heterodox Keynesians (I prefer the term classical-Keynesian), the abandonment of the fixed parities is not connected to the loss of credibility in the face of an expanding economy. This view emphasizes the role of financial liberalization in the collapse of the Bretton Woods regime. The use of capital controls during Bretton Woods implied that the rate of interest was in general low, to promote high employment, and the cost of reducing the remuneration of financial capital. The abandonment of the fixed parity system and the increasing mobility of capital allowed for interest rates to be kept at higher levels favoring financial interests.

In that sense, the end of Bretton Woods was, to some extent, a policy decision. Contrary to the collapse of the Gold Standard and the pound, the role of the dollar as the key currency (reserve and vehicle currency) did not end with end with the collapse of Bretton Woods. In other words, if lack of confidence in the dollar would have been the cause one would expect a run on the dollar and a new hegemonic currency to replace it.

My Bretton Woods entry for the Elgar Companion to Post Keynesian Economics can be read here, and downloaded here. There is a slightly modified entry for the 2nd edition, but I don't have a link to that one yet.

New Book By Eric Helleiner - Forgotten Foundations of Bretton Woods, Int. Dev. & Making of Postwar Order

Professor Helleiner is an astounding international political economist and economic historian. His archival research is impressive, and his explications and understandings of international finance are not only lucid and prolific, but extensively articulate & eloquent. His new book on Bretton Woods, like many of his other works, is certainly a tour de force.

Eric Helleiner's new book provides a powerful corrective to conventional accounts of the negotiations at Bretton Woods, New Hampshire, in 1944. These negotiations resulted in the creation of the International Monetary Fund and the World Bank—the key international financial institutions of the postwar global economic order. Critics of Bretton Woods have argued that its architects devoted little attention to international development issues or the concerns of poorer countries. On the basis of extensive historical research and access to new archival sources, Helleiner challenges these assumptions, providing a major reinterpretation that will interest all those concerned with the politics and history of the global economy, North-South relations, and international development. The Bretton Woods architects—who included many officials and analysts from poorer regions of the world—discussed innovative proposals that anticipated more contemporary debates about how to reconcile the existing liberal global economic order with the development aspirations of emerging powers such as India, China, and Brazil. Alongside the much-studied Anglo-American relationship was an overlooked but pioneering North-South dialogue. Helleiner’s unconventional history brings to light not only these forgotten foundations of the Bretton Woods system but also their subsequent neglect after World War II.

See rest here.

Amato and Fantacci on reforming international money

New Cambridge Journal of Economics paper by Massimo Amato and Luca Fantacci.

From the abstract:

In the face of the current crisis, there is growing demand for regulation, often invoked in terms of a ‘return to Bretton Woods’. The Bretton Woods Conference of 1944 was indeed the last explicit attempt to define a rule for international settlements. In fact, post-World War II currency negotiations gave place to a confrontation between two alternative visions of the international monetary system. The two plans set forth by the U.S. and by the U.K. embody two alternative principles: the first aims at producing international liquidity on the basis of a reserve currency (White’s plan for an International Stabilization Fund); the second aims at providing a pure means and measure for the multilateral clearing of current accounts in the form of a currency unit (Keynes’s plan for an International Clearing Union). The former has undoubtedly prevailed. However, it is questionable whether it is the most appropriate way to manage global imbalances. Indeed, the principle eventually embodied in the Bretton Woods system, and persisting even after its demise, tends to identify money with a reserve asset, making possible, and even necessary, the accumulation of global imbalances, despite original intentions to reabsorb them. On the contrary, the principle that inspired the alternative plan was intended to deprive money of the character of a reserve asset, thus making it the rule for international exchanges, rather than an object of regulation among others. This paper outlines the two principles both in historical perspective and in the perspective of future reforms, particularly in relation to the recent proposal by the governor of the People’s Bank of China to go back to the principles of the Keynes plan.

Read rest here (subscription required).

Bretton Woods Conference transcripts now available

The transcripts of 1944 Bretton Woods Conference were recently found at the Treasury, and have been published (a sample is available here). More info here. As noted by the NYTimes do NOT expect any major surprises though.

NPR Planet Money on Bretton Woods and the Role of the Dollar

Listen here (if the one on top doesn't work). Not bad, I should add, but it relies too much on Benn Steil's terrible book. In particular the evidence on Harry Dexter White being a Soviet spy is exaggerated. The best evidence is inconclusive. And as the program says White was responsible, or mainly so, for the use of the dollar as the key currency, which gave the US a great economic advantage. If he was pro-Soviet he was awful, wasn't him?

Kevin P. Gallagher on BRICS Consensus

By Kevin P. Gallagher

Conveniently scheduled at the end of the World Cup, leaders of the BRICS countries travel to Brazil in mid-July for a meeting that presents them with a truly historic opportunity. While in Brazil, the BRICS hope to establish a new development bank and reserve currency pool arrangement. This action could strike a true trifecta — recharge global economic governance and the prospects for development as well as pressure the World Bank and the International Monetary Fund (IMF) — to get back on the right track. The two Bretton Woods institutions, both headquartered in Washington, with good reason originally put financial stability, employment and development as their core missions. That focus, however, became derailed in the last quarter of the 20th century. During the 1980s and 1990s, the World Bank and the IMF pushed the “Washington Consensus,” which offered countries financing but conditioned it on a doctrine of deregulation.

Read rest here.

Tom O'Brien From Alpha to Omega Podcast on the Role of the Dollar

I was interviewed by Tom O'Brien of the "From Alpha to Omega" podcast. Episode also available here.



For more of Tom's interviews go here. The paper discussed in the interview is this one.

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).

Harry Dexter White on Austerity and Confidence Fairies

There is a fantastic and incredibly modern quote from White in Benn Steil's book on Bretton Woods:

"The cry of “loss of confidence” is largely a smokescreen let loose by certain conservatives who are traditionally opposed to almost any Government expenditure, who object to any increase in taxes, and are too shortsighted to know that the perpetuation of the present level of unemployment constitutes de most dangerous threat to their own interests ... The statement that the bond market could not absorb Government bonds has been made ever since the first unbalanced budget, yet today Government bond prices in the United States are higher than ever. ... If [companies] do not employ the potential purchasing power [of the unemployed], the Government can do so at virtually no expense to the community."

Of course several would dismiss White as a commie spy, even though the best evidence is that we do not know if he was a spy at all. But it's easier to blacklist Keynesians as commies than to deal with their arguments.

Graph of the Day: Frequency of Banking Crises

The graph below, from Alan Taylor's recent paper shows the frequency of banking crises around the world.

As you can see in between the Great Depression in the 1930s and the 1980s, with the beggining of financial deregulation there are NO banking crisis. As Taylor (p. 2) notes: "none [banking crises] at all occurred from World War 2 until the 1970s."That's how effective the regulation of the 1930s and the capital controls of the Bretton Woods era were.

PS: Any similarity with the graph on income inequality, that decreases after the Great Depression and grows after Reagan too, is NOT a coincidence.

Heterodox (Development) Bankers

Robert Skidelsky recounts how Victor Urquidi was instrumental in changing the future World Bank from a reconstruction to a development bank. In the words of Urquidi:

"With our chief delegate’s approval, and without any consultation with US delegation… we drafted an amendment to Article III, in order to lend more emphasis to development….Because my English was better than my fellow delegate’s I was asked to read it aloud…Keynes was characteristically quick to realise the ‘political’ significance of our amendment, which was…supported only by Peru and Norway…As he pushed his spectacles to the top of his nose and shuffled the various amendments that were upon the table, he picked out and expressed agreement with ours if we would accept a drafting change. The original text merely stated that ‘The resources and facilities of the Bank shall be used for the benefit of members’. In the amendment we submitted, we wrote a second paragraph as follows: ‘The Bank shall give equal consideration to projects for development and to projects for reconstruction…’ Keynes suggested ‘The resources and facilities of the Bank shall be used exclusively for the members with equitable consideration to projects for development and projects for reconstruction alike’. We were pleased with the word ‘equitable’ and that he put ‘development’ ahead of ‘reconstruction’. I quickly nodded…and the amendment was carried by consensus."

Urquidi then worked at the then Economic Commission for Latin America (ECLA, later with the addition of the Caribbean ECLAC), when Raúl Prebisch was the secretary general in the 1950s. For more on Urquidi go here.