Reforming the World Monetary System:
book review
Paulo Roberto de Almeida
Book review:
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)
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.
Paulo R. de Almeida
University Center of
Brasilia-Uniceub, and Brazilian Ministry of External Relations
