The End of Money

1. The End of Money Lecture 15 – Thursday, 29 October 2009J A Morrison

2. The End of Money • Left Over: History of the Bretton Woods System • After Bretton Woods • Explaining Foreign Monetary Policy • The Future of Money

3. The End of Money • Left Over: History of the Bretton Woods System • After Bretton Woods • Explaining Foreign Monetary Policy • The Future of Money

4. Notice the familiar pattern with the creation of the postwar order:Great Britain and the United States forge an agreement (biased towards the US) and the countries outside the Soviet orbit sign on…

5. The Anglo-American Postwar Order • Money: International Monetary Fund & World Bank • Agreements between White and Keynes • Trade: General Agreement on Tariffs and Trade • Anglo-American Negotiations on Trade Liberalization • Security: United Nations • Roosevelt & Churchill’s Atlantic Charter (Aug 1941)

6. The early history of the IMF was also defined by Anglo-American relations in 1947…

7. Britain’s Postwar Financial Position • 1938-1947 • Money supply tripled • But GDP only doubled (to £10.5bn) • Private and official gold & dollars down 50% • Overseas sterling balances > £3.5bn • UK Reserves: Just over £0.5bn  In sum: maintaining convertibility at the prewar parity was going to be very, very difficult

8. Restoring Convertibility in GB • US feared Imperial Preference • US demanded Britain restore convertibility  ensure level field for US exporters • Keynes’ resisted • GB needed Imperial Preference to alleviate BoP troubles • Negotiated US loan to build up reserves • JMK: getting the loan was “absolute hell” • Easter Sunday, 1946: Keynes died • (First heart attacks had been at Bretton Woods)

9. Sterling Crisis of 1947 • Anglo-American Loan • GB gets $3.75bn loan from US • But GB must restore convertibility immediately (5 years earlier than required by BWS) • 15 July 1947: Pound is convertible at $4.03 • Devalued from earlier parity of $4.86; but still overvalued • Results • Loan exhausted within weeks (not decade as planned)  GB suspended convertibility again

10. The 1947 Sterling Crisis unambiguously confirmed the financial weakness of western Europe.The BWS required countries to have either gold or dollars, but Europe had neither.The postwar order depended on the US remedying this “dollar gap.”

11. The Sterling Crisis inspired political pressure in US to (1) allow greater devaluations in Europe; and (2) furnish more robust aid.

12. Bretton Woods in Europe • 1948: Marshall Plan provides $13bn aid • 1948: Franc devalued from 119 to 214 • 1949: Sterling devalued 30% • 23 more countries followed Sterling within a week • European Payments Union created to manage European imbalances • 31 December 1958: Europe fully restores current-account convertibility • 1961: IMF says Europe is finally in compliance with BWS

13. Throughout the 1950s, the US pressed Europe to fully adhere to the Bretton Woods Agreements.The US attempted to remedy the “dollar gap” by printing money.It spread this money abroad with the Marshall Plan, wartime expenditure, and bilateral aid.

14. The Changing US Position • Changing Reserves • 1948: US has 2/3rds of global reserves • 1958: US has ½ of global reserves • 1949-1950: US current-account surplus dropped by > 50%, to $3bn/year • By early 1960s, US is consistently running trade deficits • 1960: US foreign monetary liabilities exceed US gold reserves • 1963: US liabilities to foreign monetary authorities exceed US gold reserves

15. The Vietnam War and the Great Society deepened these trends.By the late 1960s, “dollar gap” had given way to “dollar glut.”The market price of gold rose well above $35/oz and the holders of dollars became concerned.

16. Nixon • Initially promised not to leave gold • Resisted by using price controls; increased restrictions on convertibility • August 1971: Nixon “closed the gold window,” the dollar was no longer redeemable in gold  The Bretton Woods System was finished.

17. The End of Money • Left Over: History of the Bretton Woods System • After Bretton Woods • Explaining Foreign Monetary Policy • The Future of Money

18. II. After Bretton Woods What Changed? The Reinvention of the IMF

19. The BWS was an attempt to secure the benefits of openness without sacrificing monetary policy autonomy (control over domestic price level).Keynes & White wanted to avoid the experience of the 1930s: policy autonomy secured by competitive devaluations (adjustable ERs) and protectionist trade policy.

20. So, the BWS attempted to reconcile openness on trade and ER stability with policy autonomy by…(1) Erecting moderate capital controls (on “speculative” capital)(2) Managing small imbalances through the IMF

21. Summary of the Bretton Woods System • Stable ERs • ERs fixed within narrow band • No ER adjustments without consent of IMF • IMF makes loans to resolve imbalances  stops price-specie-flow • Open Trade & Commerce • IMF created alongside Int’l Trade Organization ITO • IMF embraces burgeoning GATT regime • Capital Controls • Currency convertible into gold or dollar • Limits on “speculative capital”

22. But in August 1971, Nixon “closed the gold window,” meaning: he unilaterally devalued the dollar and he suspended convertibility.After several successive conferences failed to preserve the system, the Bretton Woods System was essentially dissolved.

23. What changed?

24. Post BW Monetary System • Disorderly ERs • Increasing Number of States Float • Others choose to fix (some controversially so, like China) • Slower reactions to crises: 1994, 1997, 2008 • Regional currency agreements (Euro, CFA) • Decline of multilateralism • Challenge to US power • Euro, Yen, & Yuan aspire to be Nth Currency

25. Official ER Regimes of Major Currencies Note: These are the de jure (official) ER regimes. The regimes may not reflect market ER stability.

26. II. After Bretton Woods What Changed? The Reinvention of the IMF

27. Remember that the IMF was created principally to manage the BWS. One of its purposes was to reconcile imbalances of payments.

28. But with the transition to floating ERs, the IMF became an institution without a mission.How did the IMF react?

29. Simply put, the IMF reinvented itself.

30. It went from trying to alleviate illiquidity to attempting to resolve insolvency.It went from trying to manage imbalances of payments to redressing the supposed underlying causes of those imbalances.

31. The Washington Consensus • 1989: Formulated by John Williamson in context of Latin Amer crises & Post-Soviet Transition • Supported by IMF, World Bank, & US Treasury • 3 Pillars • Macroeconomic Discipline • Market Economy • Openness to World Economy (trade & FDI)

32. The New IMF: For Better or Worse • Variable Track Record • Good: Eastern Europe & Mexico (1994) • Questionable: 1997 East Asian Financial Crisis • Gate Keeper for International Funding • Independent monitoring & rating • Potential tool of powerful countries

33. So now we know the broad contours of the history of the international monetary system.Let’s turn now to consider how we, as social scientists, explain this empirical record.

34. The End of Money • Left Over: History of the Bretton Woods System • After Bretton Woods • Explaining Foreign Monetary Policy • The Future of Money

35. How do we explain states’ foreign monetary policies? Well, let’s return to Topic 3: Explaining Foreign Economic Policy(17-24 Sep)

36. Types of Explanations of FEP • Systemic/Structural Explanations • Variables: Distribution of Power and International Regimes/Institutions • Examples: Steve Krasner; David Lake • Domestic Explanations: 3 I’s • Ideas (Irwin) • Interests (Rogowski) • Institutions (North)

37. We’ve already applied these frameworks to explain trade policy.Now, we’ll employ them to explain some of the “critical junctures” in the history of foreign monetary policy (FMP).

38. (Remember that our mode here is to simultaneously use the theories to explain the history and to test the theories using the history.)

39. First…Charles Kindleberger, The World in Depression, 1929-39, (1973).

40. “The explanation of this book is that the 1929 depression was so wide, so deep and so long because the international economic system was rendered unstable by British inability and United States unwillingness to assume responsibility for stabilizing it in three particulars: (a) maintaining a relatively open market for distress goods; (b) providing counter-cyclical long-term lending; and (c) discounting in crisis.” (p 291)

41. Structural Theory • Hegemonic Stability Theory: Hegemon provides vital public goods • Openness • Lender of last resort • Liquidity • Theorists: • Steve Krasner: Trade openness • Charles Kindleberger: Stable international financial system • Keohane: Int’l Regimes may stand in place for hegemon

42. Second…Jeff Frieden, “Exchange Rate Politics.”

43. “[I]ncreased levels of financial and commercial integration drive monetary policy toward the exchange rate, make the exchange rate more distributionallydivisive, and lead to a more politicized context for the making of macroeconomic policy…All else equal, domestically oriented producers prefer a flexible exchange rate, internationally oriented ones a fixed exchange rate. Tradables producers prefer a weak (depreciated) currency, non-tradables producersand overseas investors a strong (appreciated) one.” (261)

44. Frieden: Domestic Interests • Increasing integration  sharper political divisions • (Sound like Rogowski?) • Map Interests onto preferences (p 260) • (1) ER Stability versus MPA • (2) High versus Low ER

45. So, FMP can be seen as a tool to serve domestic interests—just like trade.But FMP is far blunter an instrument than trade. What are the implications of that for the usefulness of this type of explanation for FMP?

46. Third…Karl Polanyi, The Great Transformation (1944).

47. (You’ve only had this in lecture, so I’ll recap it now.)

48. Polanyi: Domestic Institutions • GS ideal sacrifices MPA • Practical Implications • Deflationary bias • Price decreases brought about by unemployment • Why would a state give up MPA?  Serves capital at the expense of labor! • Polanyi’s Historical Shift: democratization • Prewar: poor weren’t represented  GS • 1930s Forward: poor stop putting up with GS

49. Fourth…G John Ikenberry, “Keynesian ‘New Thinking’ and the Anglo-American Postwar Settlement.”

50. “I argue that a transatlantic group of economists and policy specialists, united by a common set of policy ideas and a shared view that past economic failures could be avoided by innovative postwar economic arrangements, led their respective governments toward agreement by identifying a set of common Anglo-American interests that were not clearly seen by others.” (59)