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Great Architects of International Finance: the Bretton Woods

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Great Architects of International Finance: the Bretton Woods Great Architects of International Finance Who were the great thinkers on international finance in the mid-twentieth century? What did they propose should be done to create a stable inter- national financial order for promoting world trade and economic growth? This book studies the ideas of some of the most innovative economists in the mid-twentieth century including three Nobel Laureates. These great thinkers helped shape the international financial system and the role of the World Bank and the International Monetary Fund. This book covers the period from the late 1940s up to the collapse of the fixed US dollar–gold link in 1971. The impact of Hansen, Williams, Graham, Triffin, Simons, Viner, Friedman, Johnson, Mises, Rueff, Rist, Hayek, Heilperin, Röpke, Harrod and Mundell is assessed. This book will prove invaluable to students of international economics, international finance, economic history and the history of economic thought. Anthony M. Endres is Associate Professor of Economics in the School of Business and Economics, University of Auckland, New Zealand. Routledge international studies in money and banking 1 Private Banking in Europe Lynn Bicker 2 Bank Deregulation and Monetary Order George Selgin 3 Money in Islam A study in Islamic political economy Masudul Alam Choudhury 4 The Future of European Financial Centres Kirsten Bindemann 5 Payment Systems in Global Perspective Maxwell J. Fry, Isaak Kilato, Sandra Roger, Krzysztof Senderowicz, David Sheppard, Francisco Solis and John Trundle 6 What is Money? John Smithin 7 Finance A characteristics approach Edited by David Blake 8 Organisational Change and Retail Finance An ethnographic perspective Richard Harper, Dave Randall and Mark Rouncefield 9 The History of the Bundesbank Lessons for the European Central Bank Jakob de Haan 10 The Euro A challenge and opportunity for financial markets Published on behalf of the Société Universitaire Européenne de Recherches Financières (SUERF) Edited by Michael Artis, Axel Weber and Elizabeth Hennessy 11 Central Banking in Eastern Europe Nigel Healey 12 Money, Credit and Prices Stability Paul Dalziel 13 Monetary Policy, Capital Flows and Exchange Rates Essays in memory of Maxwell Fry Edited by William Allen and David Dickinson 14 Adapting to Financial Globalisation Published on behalf of the Société Universitaire Européenne de Recherches Financières (SUERF) Edited by Morten Balling, Eduard H. Hochreiter and Elizabeth Hennessy 15 Monetary Macroeconomics A new approach Alvaro Cencini 16 Monetary Stability in Europe Stefan Collignon 17 Technology and Finance Challenges for financial markets, business strategies and policy makers Published on behalf of the Société Universitaire Européenne de Recherches Financières (SUERF) Edited by Morten Balling, Frank Lierman and Andrew Mullineux 18 Monetary Unions Theory, history, public choice Edited by Forrest H. Capie and Geoffrey E. Wood 19 HRM and Occupational Health and Safety Carol Boyd 20 Central Banking Systems Compared The ECB, the pre-Euro Bundesbank and the Federal Reserve System Emmanuel Apel 21 A History of Monetary Unions John Chown 22 Dollarization Lessons from Europe and the Americas Edited by Louis-Philippe Rochon and Mario Seccareccia 23 Islamic Economics and Finance A glossary, 2nd edition Muhammad Akram Khan 24 Financial Market Risk Measurement and analysis Cornelis A. Los 25 Financial Geography A banker’s view Risto Laulajainen 26 Money Doctors The experience of international financial advising 1850–2000 Edited by Marc Flandreau 27 Exchange Rate Dynamics A new open economy macroeconomics perspective Edited by Jean-Oliver Hairault and Thepthida Sopraseuth 28 Fixing Financial Crises in the 21st Century Edited by Andrew G. Haldane 29 Central Banking in Eastern Europe Edited by Nigel Healey and Barry Harrison 30 Exchange Rates, Capital Flows and Policy Edited by Rebecca Driver, Peter Sinclair and Christoph Thoenissen 31 Monetary Policy and Unemployment The U.S., Euro-area and Japan Edited by Willi Semmler 32 Great Architects of International Finance The Bretton Woods era Anthony M. Endres Great Architects of International Finance The Bretton Woods era Anthony M. Endres First published 2005 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by Routledge 270 Madison Ave, New York, NY 10016 Routledge is an imprint of the Taylor & Francis Group This edition published in the Taylor & Francis e-Library, 2005. “To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” © 2005 Anthony M. Endres All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data A catalog record for this book has been requested ISBN 0-203-02214-9 Master e-book ISBN ISBN 0-415-32412-2 Contents List of tables x Preface xi Abbreviations xiii 1 Essential elements of a doctrinal approach 1 The primacy of ideas 1 On the intellectual architecture of the international financial order 3 Choice of great architects 5 Economic ideas and international financial policy: normative issues 8 Main purposes of a doctrinal perspective 10 2 The Bretton Woods financial order – a distinctive economic doctrine 14 Some intellectual background 14 Bretton Woods: first principles 18 Commentary 22 Policy assignment guidelines at Bretton Woods: a reconstruction 28 Conclusion 31 3 Alvin Hansen’s Keynesian interpretation of Bretton Woods 35 An American Keynesian at Bretton Woods 35 Clarifying the BW exchange rate principle 38 Promoting international economic stability through monetary and fiscal policies 44 viii Contents International action to combat secular stagnation and underdevelopment 49 Conclusion 52 4 John Williams’s ‘key currency’ alternative for the international financial order 56 International monetary problems in the interwar years: a view from Harvard 56 Williams’s reaction to Bretton Woods and his alternative 62 Principal criticisms of the key currency architecture 68 Other policies essential to the key currency architecture 72 Summary and assessment 75 5 Frank Graham on international money and exchange rates 79 Graham’s critique of gold standards 79 Heretical pronouncements on BW principles 84 The commodity reserve standard proposal 89 A plan for full employment and price stability after BW 93 Conclusion 99 6 Robert Triffin’s supranational central bank: a plan to stabilize liquidity 102 Intellectual background 102 Triffin’s revisionist views on the operation of the gold standard 103 New ‘canons’ of international financial behaviour: qualified support for BW 107 The key currency convertibility crisis 112 The supranational bank proposal and its limitations 116 Concluding reflections on Triffin’s policy assignment guidelines 122 7 A Chicagoan international financial order 127 A Chicagoan tradition on international financial reform? 127 Reactions to BW: Simons and Viner 128 Milton Friedman’s case for flexible exchange rates 135 Friedman’s monetary and fiscal framework for international stability 140 Contents ix Harry Johnson’s renewed case for flexible exchange rates 144 Policy assignment rules for a Chicagoan international financial order 147 8 Reconstructing the international gold standard: European perspectives 150 A genuine gold-based international financial order: the Mises ideal 150 The bastardized interwar gold standard and an alternative to BW 153 Mid-twentieth-century gold standard doctrine 158 Mid-twentieth-century gold standard doctrine: a synthesis? 170 9 Salvaging the fixed exchange rate architecture: the ideas of Roy Harrod and Robert Mundell 176 Roy Harrod’s advocacy of a rise in the price of gold 176 Harrod on IMF renovations: the case of SDRs 180 Harrod’s principles for domestic policy in a reformed BW architecture 184 Robert Mundell on the failing BW order, circa 1965–71 188 The currency area option 195 Reforming the BW financial architecture? 198 10 The plurality of international financial architectures in the BW era 204 Implications arising from the architecture metaphor 204 Principal beliefs embodied in various architectures 208 A plurality of financial architectures: some lessons from our survey 212 Notes 217 Bibliography 237 Index 254 Tables 2.1 Summary: BW Agreement: guidelines for policy instruments 32 3.1 Hansen’s ‘Keynesian’ policy assignment rules 53 4.1 Summary: Williams’s key currency policy guidelines 76 5.1 Graham’s exchange rate choices 85 5.2 Summary: Graham’s rule-based scheme for economic policy 100 6.1 The Triffin Plan: reserve creation through purchase of securities 118 6.2 Triffin’s guidelines for national policymakers and the SCB 124–5 7.1 Summary: Chicagoan rule-based programme in the BW era 148 8.1 Synthesis: a rule-based gold standard for the mid-twentieth century 172 9.1 Restoring BW: Harrod’s and Mundell’s rules and policy reforms 202 10.1 What financial architects in the BW era believed: some generalizations 209 Preface There have been no modern, systematic studies of proposals made for international financial reconstruction or reform by economists, bankers and international financial commentators from the 1940s to the present. This study examines the work of some of the world’s most innovative international financial reformers in the fixed exchange rate era from the mid-1940s to the early 1970s. To understand the merits and limitations of recent international financial reform proposals as well as the functioning of the international financial system in the early twenty-first century, this book should be read first. A companion study continuing the story begun here to cover the period from the 1970s until the end of the twentieth century will follow in due course. Currently, international finance as a subdiscipline of economics is a highly technical subject. A technical approach is not taken in this book.
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