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.

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.

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?

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).

Banker's views of Keynesian economics

Randolph Burgess, a president of the American Bankers Association (ABA) and later Under Secretary of the Treasury in the Eisenhower administration, wrote in a letter to Harry Dexter White on the creation of what eventually became the International Monetary Fund (IMF), the following:

"The interpretation of the fund as a means for expansion rather than for stabilization is encouraged by Lord Keynes' address before the House of Lords. It sounds like the philosophy of deficit spending over again, - the use of credit as a cure-all."

Bankers were not very fond of deficits and full employment, then and now. They wanted a smaller fund, with currencies tied to gold (presumably the dollar, like White wanted and got it), to avoid inflationary pressures. An anti-Keynesian IMF. And it seems that bankers got basically what they lobbied for. By the way, bankers have been lobbying for watering down all the regulations associated with Dodd-Frank and the so-called Volcker Rule in the last few years. How well do you think they fared this time around?

Harry Dexter White, Lauchlin Currie and the Red Scare

In another post I pointed out one (and there are more) of the theoretical problems with Benn Steil's account of the Bretton Woods history. I would also emphasize that there are questionable historical assumptions too in his book. In particular, the book's description of both Harry Dexter White and Lauchlin Currie as Soviet spies is problematic. Steil basically accepts at face value Whitaker Chambers and Elizabeth Bentley's, two self-confesed Soviet agents, testimonies regarding White and Currie, and a certain interpretation about the revelations of the Venona Project after the fall of the Soviet Union (the original New York Times story here; subscription required).

I'm not going to get into the details, but on Currie, Roger Sandilands' paper (subscription required) is quite conclusive in my view suggesting that he did share information with Russians, but was in no way a spy. It is particularly important in this context what John Kenneth Galbraith expressed in a letter to Roger (in the paper cited, p. 99), namely:

"That he was a Soviet agent is, of course, untrue; what is true, is our failure to remember that the Russians in those days were our allies, and taking casualties beyond anything experienced by Americans. It was, in those days, official policy that we offer help, and the Russians could be certain, and rightly, of a warm reception as allies in Washington. As I say, this has now been forgotten; only those of us who were there remember our relief when they came into the War and the way they took casualties and suffering far beyond anything experienced ourselves."

On the White case the book to read is Bruce Craig's Treasonable Doubt that also suggests that the case against him is at best inconclusive, indicating that the information he shared with the Russian allies was not part of a espionage operation. This indicates that, while they passed information to Soviet agents, they did not intentionally betray the US national interests. As Julius Kobyakov, a Russian intelligence agent, suggested here: "Among the members of my profession there is a sacramental question: 'Does he know that he is our agent?' There is very strong indication that neither Currie nor White knew that."

On this very topic is worth noticing what Steil himself tells us about White regarding Bretton Woods negotiations. According to him: "White wanted to make the US dollar, and only the US dollar, synonymous with gold, which would give the US government a virtual free hand to set interest rates and other monetary conditions at will -- not just for the United States, but for the world." In other words, he put US interests above anything else in the Bretton Woods negotiations, something that would make the International Monetary Fund (IMF), an institution that owes more to White than Keynes, a tool of US interests and for creditor countries in general. If he was a Soviet spy then he had his priorities upside down, or was a terrible spy.

In more general terms, I would add, it seems that the line of attack on some New Dealers, like Currie and White, tainting them as Reds or fellow travelers, is not very different from the indictment of Keynes's ideas on the basis of his sexual orientation, recently brought to general attention in the Niall Ferguson case. One cannot trust the childless-gay-commie is the not so subtle message. If you cannot attack the ideas, go for the messengers' credibility, that's the right wing nut fringe strategy.

PS: Currie and White are only the tip of the iceberg. Svetlana Chervonnaya argues, convincingly, in a paper that Alger Hiss was not the Ales of the Venona documents, and that the case that he was a spy is also open. In the Rosenberg case, the Schneirs argue that while it is clear that Julius was a spy, a low level one that did not pass any relevant information on the bomb, it is also clear that she wasn't and that the US government knew it. If the US had given him the same treatment than other spies got, with similar offenses, he would have gotten a few years of jail time, and she should have not been accused at all. On the effects of this travesty of justice on the family it's worth watching the beautiful documentary by Ivy Meeropol Heir to an Execution.

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.

Capital controls and exchange rates

This was the topic of the RBI/ADB conference in Mumbai. No particular surprises. The consensus is that capital controls affect the composition of flows, but not their volume, and even the IMF, represented by Jonathan Ostry, suggested that capital controls should be part of the tool kit used by central banks. Also, some skepticism on the efficiency of short term (or episodical controls, such as the ones used by Brazil) was raised. Of course there are still differences on what circumstances capital controls are actually necessary.

Most of the discussion was related to the use of capital controls to reduce the risk of appreciation, since in the last decade developing countries have had to deal with inflows and a depreciating dollar. Note, however, that capital controls were not thought when originally defended by Keynes and White at Bretton Woods to be necessary for reducing appreciating tendencies, but to limit capital flight (and avoid and external crisis) and provide monetary autonomy (Impossible Trinity or Trilemma).

Further, in historical perspective, exchange controls (capital controls on quantities not prices) have been used as an instrument for industrial policy, to determine that the use of dollars is prioritized for capital equipment imports particularly in the periphery. In that sense their use is in fact an essential an permanent tool in the developing economy set of instruments, and that's why signing FTAs or BITs that reduce the ability to deploy capital controls is dangerous.

PS: On the long standing issues related to capital controls and exchange rate regimes see this paper.