1164. “Reforming the World Monetary System: book review”,
[Book
Review of Carol M. Connell: Reforming the World Monetary System: Fritz
Machlup and the Bellagio Group (London:
Pickering & Chatto, 2013. xii + 272 pp.; ISBN 978-1-84893-360-6; Financial
History series n. 21, $99.00; hardcover)], em
Mundorama (n. 91, 22/03/2015; ISSN:
2175-2052;
Divulgado no Academia.edu (link: https://www.academia.edu/10006775/2705_Reforming_the_World_Monetary_System_book_review_2014_).
Relação de Originais n. 2705.
Review of “Reforming the World Monetary System” of Carol M. Connell, by Paulo Roberto de Almeida
This
book appears in a Financial History series of the Pickering &
Chatto, which has already published as diverse studies in this area as
one on Argentina’s parallel currency, another on the federal banking in
Brazil, with most of titles being about banking and finance in the North
Atlantic world, from the colonial times to the 20th century.
Carol Connell is Professor of Finance and Business Management at the
School of Business, Brooklyn College, City University of New York, where
she is very well rated by her students; and she is now directing a new
monograph series on Modern Heterodox Economics, also being published by
Pickering & Chatto. Connell prepared this very well researched work
benefitting from a fellowship research grant from the Earhart
Foundation, a private charitable institution that funds scholarly
research; one of its early beneficiaries was Friedrich von Hayek, who
wrote The Road to Serfdom (1944).
Some scenarios and arguments presented in this book were first made public in academic publications, such as the Journal of Management History and the Journal of the History of Economic Thought,
and Connell’s interest in Fritz Machlup career and work arose when she
was researching about one of his students, the growth theorist Edith
Penrose. Besides the preeminent presence of Machlup, the book also deals
with the contributions for the discussion and reform of the
international financial and monetary system by luminaries such as Robert
Triffin, William Fellner, and Milton Friedman.
In the introduction the author states
very clearly that her objective was the study of the complex reform
process that, from the Sixties up to the Seventies, led to the adoption
of a flexible exchange rate – instead of the fixed parity established at
the Bretton Woods conference (1944) – and the introduction of the
special drawing rights as the main “currency” of the International
Monetary Fund (p. 1). Based on archival and published sources, the book
follows, in thirteen extensively annotated chapters, the itinerary of
the Bellagio Group, established under the leadership of Fritz Machlup,
and integrated by 32 non-government academic economists, working in
intimate contact with policy makers and IMF officials, between 1963 and
1977. Bellagio Group’s primary documents are everywhere referenced, but
there are also 299 secondary sources in the bibliography, among them
(besides the four big economists), Charles Kindleberger, Edith Penrose,
Fred Bergsten, and John Williamson.
Trying perhaps to emphasize the current
appeal of her study to contemporary policymakers and researchers,
Connell states in her Introduction that there could be in Machlup’s
approach something similar to the Group of Twenty Finance Ministers and
Central Bank Governors (G20), which is clearly a non performing analogy,
essentially because of the independence of views of the former
vis-à-vis the narrow interests of today’s governments. Notwithstanding,
Bellagio Group worked in close contact and cooperation with the Group of
Ten, launched simultaneously within the IMF. The intention of the
Treasury Secretary Douglas Dillon was to devise a monetary reform in an
already stressed arrangement, in a context when the ten most important
countries tried to control and minimize the imbalances of the world
economy, the growing liquidity crises, and the volatility in the price
of gold (partially circumvented by the introduction of swap facilities
and the creation of the General Arrangements to Borrow).
After explaining her research questions
and original hypothesis, and informing where Machlup’s and Triffin’s
papers are located (Hoover and Yale), Connell opens Chapter 1 by
describing the crisis of confidence that arouse in early Sixties,
leading to the various exercises of academic debates and institutional
brain-storming that mobilized the most important economist of that
decade. Late in the Fifties, Robert Triffin was already predicting a
forthcoming crisis, and calling for a radical reform of the monetary
system in his Gold and the Dollar Crisis (1960). Feeling
challenged by the convening by Dillon of an IMF Studies Group, within
the Group of Ten, and excluding academic economists, Machlup, Triffin
and Fellner decided to “embark on their own study, involving economists
of widely divergent views and with no problem or proposal considered
‘out of bounds’. Hence the idea for a series of alternative conference
was born” (p. 18), and that was the Bellagio Group, which first met at
this Italian resort of the Lake of Como. A brief chronology of the
monetary system events from 1944 and 1977 and a synthetic table on the
various exchange rate policies and regimes (from gold standard to
flexible) close this chapter.
Chapter 2 introduces the life and thought
of Fritz Machlup, who had been working and publishing in the area of
monetary reform for many years before the convening of his “child”, the
Bellagio Group. Born (1902) in a pre-1914 Europe (Austria) with “ten
currencies, all with fixed gold parities and fixed exchange rates”,
Machlup soon afterwards (1920) was presented to a continent with
“twenty-seven paper currencies, none with a gold parity, none with fixed
exchange rates and several of them in various stages of inflation or
hyperinflation” (p. 23). From 1923 to 1962 Machlup studied and published
extensively on monetary problems, particularly the gold standard, but
also dealt with patents, industrial organization, production of
knowledge and theory of the firm. His 1923 dissertation on the
gold-exchange standard at the University of Vienna was supervised by
Ludwig von Mises; a decade later he was already residing in the U.S. and
teaching at the University of Buffalo; at that time, “he was already
the first economist to frame the discussion of balance of payments
problems in terms of payments adjustment, liquidity and confidence” (p.
27). John Williamson, a former student, “attributed Machlup’s belief in
the importance of the confidence to the role it had played in the
collapse of the gold-exchange standard during the Great Depression” (p.
29). The same would occur thirty years later, with the U.S. involvement
with and expenditures for the Vietnam’s War, and European countries
distrust of America’s capacity to honor its commitments under Bretton
Woods. Machlup anticipated the scenario with his lengthy essay “Plans
for Reform of International Monetary System”, first published in 1962
and reissued in 1964, significantly updated (p. 32).
Chapter 3 is dedicated to Robert Triffin –
a Belgian who worked for the Federal Reserve and the IMF, and professor
at Yale from 1951 to 1977 – and to the 1959 Triffin Plan, proposing the
replacement of gold and foreign-exchange reserves by gold-guaranteed
deposit accounts at the IMF, within a more flexible system. But, at that
time, as argued by Charles Kindleberger, even if many economists
proposed the idea, “few central bankers recommended flexible exchange
rates as a means of eliminating … all the problems of adjustment,
liquidity and confidence” (p. 42). Even if Triffin’s solution could be
first-best economically, it was politically out of question. The head of
the Group of Ten at IMF, Otmar Emminger, “found the Triffin Plan
unacceptable because nations were not prepared to hand over so much
responsibility and financial power to an international body” (p. 42). At
that juncture, confidence, not liquidity, was the problem that made
Triffin and Machlup to come together intellectually (p. 47).
Chapter 4 deals with Budapest born (1905)
William Fellner, a fugitive from the Nazis, like the two others;
professor at Berkeley in 1939, he worked mainly at the intersection of
macro and microeconomics, researching and writing about inflation,
regulation, growth and balance of payments problems, including in
cooperation with the other two in monetary and exchange questions, both
in theory and policy. In 1963, he was dealing with budgetary deficits
and their consequences, which led to adjustments efforts, and also to
the confidence question. Differently from the planned equilibrium
advocated by Triffin, Fellner “recommended instead letting free-market
processes perform more of the equilibrating function”(p. 57). In many
papers, he proposed a limited exchange-rate flexibility system. In fact,
both Machlup and Fellner were committed to freely floating
exchange-rates, but were aware of the responsibility of national
governments, which led them to explore a myriad of possible solutions.
The title of Chapter 5, Why Economists
Disagree, takes its name from Machlup’s speech before the American
Philosophical Society, in November 1964, five months after the fourth
Bellagio Group conference. He explained then his decision to invite 32
economists from eleven countries, most of them from divergent schools of
thought, to explore solutions for the problems of the international
monetary system of the 1960s. They had to consider hybrid or compromise
solutions for the identified problems. This chapter presents each one of
the participants, their background and works. The sources of
disagreement are very well abridged in a table dealing with the four
major policy proposals for reform: semi-automatic gold standard,
centralized international reserves, multiple currencies and/or flexible
exchange rates (p. 76-78). All proposals were carefully examined at a
series of scenario-planning exercises through various Bellagio
conferences, allowing the economists to evaluate the “relative impact on
payments, liquidity and confidence of the four basic exchange regimes,
given any one or combination of them might have been adopted” (p. 80).
Chapters 6 and 7 deal, respectively, with
the hypothesis of multiple reserve currencies and Milton Friedman’s
arguments for fixed versus flexible exchange rates, in a paper he
presented in 1953, making the case for a floating regime. This regime,
for him, “has the advantage of monetary independence, insulation from
real shocks, and a less disruptive adjustment mechanism in the face of
nominal rigidities than it is the case with pegged exchange rates” (p.
99). These two chapter are of a more theoretical and historical nature,
despite the fact that all questions discussed in them had a very
practical impact on each devised solution for the problems plaguing the
international monetary system.
Chapter 8, Collaboration With the Group
of Ten, makes the bridge between the two groups, the IMF technocrats and
government officials, for one side, the independent academic
economists, for the other. Machlup pressed hard on his team, achieving a
detailed report, International Monetary Arrangements: The Problem of Choice,
two months before (in June 1964) the Group of Ten and the IMF staff
could prepare theirs. He also frankly explained, at the first joint
meeting, later that year, the differences between the two approaches.
This led to the assignment of Group of Ten chairman, Otmar Emminger, to
the Bellagio Group, inaugurating a thirteen-year collaboration. The
tasks for the groups were the same, but working methods, and freedom of
opinion, made them very different, as well as purposes: Bellagio
emphasized disagreements among the proposals, and the nature of their
differing impact on the problems dealt with. Friedman, in 1965,
criticized the report for not offering one unified solution for the
crisis, but Machlup pointed out that a consensus was achieved on the
consequences of each solution proposed by his group: governments and the
IMF had food for thought.
Chapter 9, Adjustment Policies and
Special Drawing Rights: Joint Meetings of Officials and Academics, is a
continuation of this kind of collaboration, now assuming other forms of
joint exercises, as the deputies of the Group of Ten start to met
regularly with the Bellagio Group, and did so from 1964 to 1977,
resulting in the creation of special reserve assets, later called the
Special Drawings Rights (due to the French Finance minister, Valery
Giscard D’Estaing, insistence on considering them a credit, not an owned
reserve). The three Bellagio main economists were the organizers of
those meetings, which assumed a kind of a NGO feature. “From 1970 to
1977, discussions would focus on the increasing liberalization of the
international capital market and the wisdom of special drawing rights
for developing countries” (p. 128). This period also corresponds to the
U.S. going off the gold and to the floating of the Deutsche mark: main
questions became managed floating and international liquidity. A Basle
meeting in 1977 was the last meeting of a Joint Academic and Officials
meeting, and the first allocation of SDRs was held in 1970. A new time,
no less challenging, had arrived for and within the international
monetary system.
Chapter 10, From the Bellagio Group to
the Bürgenstock Conferences, explores the continuation of the
semi-academic discussions under a new format, this time dealing with
floating exchange regimes in various guises, but always under the
influence, and the intellectual guidance, of Fritz Machlup, who intended
to prepare a well conceived book out of the exercise: this came at
light in 1970, as a Princeton University Press publication, Approaches to Greater Exchange Rate Flexibility: The Bürgenstock papers.
The analysis takes ground on the Austrian background of Machlup’s
thought, which also gave light to planning methods based on Delphi
scenarios. A first meeting, with a large number of officials, academic
people but also representatives from banks and corporations, was held in
Long Island, in January 1969, followed by a second meeting in June, in
Bürgenstock, Switzerland, where five more meetings were organized.
Chapter 11, follows the lead, dealing
with de facto successor of the Joint Meeting of Officials and Academics,
which was an extended Bellagio Group, the Group of Thirty, which
included members from all the current G20 financial group. The Group of
Thirty meet twice a year at the beginning of the 1980s, and was broader
than the Bellagio Group, including industrialists and private bankers,
and preferred not to commission papers from academics, establishing
instead an agenda for discussion comprising issues of capital movements
and less developing countries assets, international banking supervision,
and energy (the issue of the moment). But Fritz Machlup was still on
the party, with a minor group of academics. A so-called Bellagio Group
met again in 1996, under the leadership of the general manager of the
Bank for International Settlements, and has been meeting once a year at
the Italian resort, under the intellectual guidance of professor Barry
Eichengreen, from Berkeley, and always financed by the BIS.
Chapter 12 is dedicated to Reassessing
the Bellagio Group’s Impact on International Monetary Reform; Carol
Connell affirms that there are “significant parallels between the calls
for monetary system reform in the 1960s and those for reform following
the financial crisis of 2008-9” (p. 185). This comparison seems off the
mark, as the current financial G20 has achieved nothing comparable,
besides pressures for the negotiation and implementation of a more
stringent set of Basel prudential rules for the banking sector. The
outcry about the dollar crisis has been responded by nothing else than
the confirmation of its centrality for the current financial and
monetary “non-system”. Initial rumors – at its monnaie unique début – about the strength of the euro were replaced by recent fears of its demise.
Notwithstanding this, Connell presents a
clear historical synthesis about the importance of the Bellagio Group
for the understanding of the most crucial problems of the international
monetary system as devised at Bretton Woods: all of the group members
came from G-10 countries, the same as the suppliers of the General
Arrangements to Borrow (now expanded, and with the New GAB). At least,
the academics convinced the central bankers that floating exchange
regimes could work, and that flexible currencies could cushion external
shocks; that is not a minor intellectual achievement. And, the same
problems they tackled, adjustment, liquidity, and confidence, continue
to be at the center of the nightmares of the central bankers and finance
officials alike (together with new preoccupations, on the fiscal side,
as demography imposes its burdens over all). It seems that liquidity is
no more an issue today, as governments create real tsunamis of new
financial assets, pushing national debts to new higher peaks.
In the bright side, this Chapter 12
finishes with an impressive list of publications of the Princeton
Finance Section under Fritz Machlup’s leadership, from 1960 up to 1971,
no less than 98 titles authored by many of the most well-known names of
the economics trade, and certainly some of Nobel-worth distinction in
this profession.
Chapter 13, finally, is a beautiful piece
of scholarly work: The Impact of the Bellagio Group on International
Trade and Finance Scholarship from the 1960s to the Present, which could
also be called something like “the sons and daughters of Machlup,
Triffin and Fellner” (and now their grandsons and grand-daughters, like
Connell herself). She lists some disciples of the mentors: Edith
Penrose, Stephen Hymer, Charles Kindleberger, James Tobin, Andrew
Crockett, Edwin Truman, and many others.
Conclusions, at last, summarizes the
lessons drawn from each chapter, before returning to the initial
hypothesis. Great Depression and World War II influenced how economists
thought about policy, inflation, interest rates, deficits and government
intervention. Machlup, Triffin and Fellner were the intellectual
masters behind much of the conceptual thinking about the great
challenges emerging from a world order devised with some improvisation,
and no practical guidance, at the end of the II World War. With some
Austrian ingenuity and innovative and creative thinking of their own,
they are at the core of the adjustments and arrangements that were made,
in the Sixties and the Seventies, for the current, certainly limited
and incomplete, international monetary system (or non-system, at
discretion). One of her hypothesis, that of the centrality of the
Bellagio Group for the reform of the international monetary system, is
largely confirmed and deserves proper acknowledgment: they have had a
real impact on practical policies, and in the reconfiguration of the
multilateral financial organizations. And their influence on scholarship
and empirical research over a so large community of academic and
applied economists is beyond recognition of traditional prizes and
honors.
Book review:
- Carol M. Connell: Reforming the World Monetary System: Fritz Machlup and the Bellagio Group (London: Pickering & Chatto, 2013. xii + 272 pp.; ISBN 978-1-84893-360-6; Financial History series n. 21, $99.00; hardcover)
Paulo R. de Almeida, University Center of Brasilia-Uniceub, and Brazilian Ministry of External Relations (pralmeida@me.com)
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