Skip to main content
main-content

Über dieses Buch

For twenty-five years, the International Monetary Fund administered a worldwide system of fixed exchange rates until their system was destroyed by a combination of market forces and those who advocated market forces. The first destructive element has been extensively analyzed; the second has hitherto been almost completely ignored. Robert Leeson examines the process by which the case for flexible exchange rates was transformed from an academic exercise to become the organizing principle for international monetary relations.

Inhaltsverzeichnis

Frontmatter

Introduction

1. Introduction

Abstract
On the frontispiece of Alfred Marshall’s Principles of Economics is the statement: natura non facit saltum (‘nature does not proceed by sudden leaps’). Yet, in the early 1970s, after a quarter of a century of bureaucratically determined exchange rates, the world appeared to leap into a regime of market-determined exchange rates. In the previous decade, those who administered and policed the Bretton Woods international monetary system considered a variety of reforms but ‘firmly and unanimously discarded at the very outset’ the two reforms that were subsequently implemented: flexible exchange rates and flexible gold prices (Triffin 1968, 105; 1976, 49). The role played by academic economists in this international revolution has usually been relegated to minor proportions or ignored altogether. Yet, what appeared to be a sudden policy leap had been preceded by years of academic campaigning — a campaign that is documented and analysed in this study.
Robert Leeson

The intellectual and Institutional Framework

Frontmatter

2. The Combatants

Abstract
This study is largely organised around the intellectual and institutional battles between the IMF and the influence of Milton Friedman. It focuses on the process by which the defenders of a par value system were confronted by an academic heretic who, having nailed his theses (first in Germany, just as a predecessor had done four and quarter centuries before) tenaciously pursued his heresy. Friedman’s intellectual rebellion against ‘papal’ authority invoked the right of national economic sovereignty, and after almost ‘30 years’ of intellectual and political schism, the 1976 ‘Treaty’ of Jamaica resembled the 1648 Treaty of Westphalia in terms of the toleration offered to heretical floaters.
Robert Leeson

3. Full Employment, Free Trade and Fixed Exchange Rates

Abstract
From Adam Smith to Alfred Marshall (1926 [1903], 394) most respectable economic opinion accepted the ‘simplicity and naturalness of Free Trade’ over the corruption and ‘moral harm’ associated with protection. The 1944 Bretton Woods agreement was designed to provide the post-war international stability to facilitate the approach towards both free trade and full employment. Per Jacobsson (1959, 12, 14) and his associates who administered the par value system believed that they were providing a vital ingredient that relieved businesses of the uncertainty associated with exchange rate instability, thus lowering costs and contributing to the expansion of world trade. They also believed that the IMF was the institution which guaranteed exchange stability. They did ‘not think that anyone would seriously dispute’ the ‘purposes’ of the IMF in this regard. They believed that ‘strengthening of the existing exchange structure’ was ‘in the general interest’.
Robert Leeson

4. Friedman’s Case for Flexible Exchange Rates

Abstract
Friedman advanced floating exchange rates as the only reliable method of facilitating free trade, about which ‘there has been virtual unanimity among economists’. In this way ‘international cartels would disappear’ and the US ‘could come close to eliminating any danger of significant internal monopolies’ (Friedman and Friedman 1980, 60–1, 76–7). Friedman (1953, 158, 164–5, 167, 171, 187, 197) took ‘unrestricted multilateral trade’ as an axiomatic objective: ‘the fundamental requirement is that governments not use restrictions on trade of any kind to protect exchange rates’. The ‘absence of flexible exchange rates is almost certain to be incompatible with unrestricted multilateral trade’.
Robert Leeson

5. The Bretton Woods Establishment

Abstract
The first two IMF Managing Directors, Camille Gutt and Ivar Rooth, both independently described their experiences as ‘the worst years’ of their lives. There was a perception that the Fund was ill suited to the post-war environment and had become a ‘white elephant’ and a ‘bank without clients’ Games 1996, 83–4, 91, 102). In the early years, there had been several devaluations and several renegade currencies floating. But after 1957, the IMF was pleased to report a reversal of these tendencies. The return of the prodigal Italian, Greek and Canadian currencies was especially welcomed: these experiences reinforced IMF prejudices against fluctuating rates (de Vries 1969, 164). In December 1958, Jacobsson negotiated with the French to establish a par value with the IMF for the first time since 1946 Games 1996, 106–7). Afterwards, to preserve the par value system, the international policemen began insisting that exchange rate adjustment could only be considered under very exceptional conditions (Machlup 1966a, 65). Thus the IMF was regarded as having come of age at this time (Krause 1971, 14).
Robert Leeson

The Academic Process: from the 1940s to the Friedman and Nixon Presidencies

Frontmatter

6. The Early History of the Case for Floating Exchange Rates

Abstract
Friedman was neither the first nor the only economist to make the case for flexible exchange rates (Machlup 1964, 79–80).1 Roy Harrod (1933, 102–3, 137–0, 173–5, 180–1), for example, described ‘The New Freedom. … When the Gold Standard is Abandoned.… The only well-tried expedient is laissez-faire; most of the authorities, who think about the matter at all, probably hope that the old expedient will still serve. Their hope is not likely to be realized’ [emphases in original]. Harrod advocated ‘international co-operation’ through an ‘international committee’ so that exchange rates could be changed (by a maximum of 2 per cent per annum) in a ‘regular and orderly manner’. Harrod also conceded that his analysis of world monetary reform could be ‘condemned as merely academic’. But he added that ‘The present generation of politicians and bankers will pass away. They will endeavour to hand on their stock of clichés to those who succeed them. But even clichés pass out of fashion in time.’
Robert Leeson

7. An Emerging Academic Consensus

Abstract
In the 1960s, there were tensions within the White House about international monetary reform. Douglas Dillon, President Kennedy’s Treasury Secretary, had been Under-Secretary of State during the Eisenhower administration and was an ‘elegantly tailored, handsome man… with the quiet assurance of someone having just achieved a pinnacle of personal success’. When Charles Coombs (1976, 16–17, 20), the senior Vice President in charge of the foreign exchange desk at the New York Fed, ‘watched [Dillon] at international gatherings I could not help feeling a certain national pride’. Coombs recalled Kennedy insisting that the gold-dollar price was ‘immutable’. The idea of altering either of these prices was ‘not a respectable matter for discussion in the halls of the Treasury’ (Volcker and Gyohten 1992, 20, 22, 25).
Robert Leeson

8. 1966: Four Conferences

Abstract
After the publication of the two competing reports in August 1964, a series of joint bureaucrat-academic conferences were held. The first was at Princeton in April 1966. Fellner (1966, 112, 122) presented a statement signed by an impressive array of economists including Friedman, Johnson, Meade, Hansen and Jan Tinbergen complaining (among other things) that exchange rate flexibility had ‘received little attention in official circles’.1 Haberler (1966, 128, 134) complained that those involved in ‘practical discussions’ often tacitly assumed that wages and prices were entirely flexible. In reality, wages were rigid downwards and contraction would violate ‘the modern view, to which almost everyone subscribes, that, in principle, unemployment must be avoided. To that extent everybody is a Keynesian now.’ Haberler pressed for exchange rate variations as ‘the only alternative to more and more controls’. Tibor Scitovsky (1966, 197) complained that exchange rate adjustment was regarded as ‘an extreme emergency measure’. This contrasted with the ‘greater faith — or hopes… of most of the academic specialists today — towards greater exchange rate flexibility’ as opposed to selective restrictions and controls which were ‘counsels of despair’ (Fellner, Machlup and Triffin 1966, 5–6). The choice was perceived to be between exchange rate or aggregate demand adjustment and direct controls.
Robert Leeson

9. 1967: the AEA President versus the AFA President

Abstract
An editor of Fortune magazine described the May 1967 Friedman-Roosa debate about exchange rates as ‘the most important money debate’ he had ever heard.1 Roosa, the current President of the American Finance Association (AFA), was regarded as ‘the foremost American expert on international monetary affairs’ (Volcker and Gyohten 1992, 21). The 49-year-old Roosa (1961, 125) was the quintessential ‘Best and Brightest’. Friedman, the current AEA President, had been ‘persona non grata in the Federal Reserve Board’ (Wallis 1976 [1964], 102). He continued to demonstrate to the satisfaction of increasing numbers of academic observers that his solution to the US balance of payments problem could achieve what all the king’s men could not.
Robert Leeson

The Policy Process: 1968–71

Frontmatter

10. From Academia to Washington

Abstract
In 1945, 90 per cent of AEA economists polled favoured the adoption of the Bretton Woods agreement (Meier 1982, 52). Eli Shapiro (1970, 84) doubted that 1 per cent of post-war monetary economists would have predicted the extent of Friedman’s ‘Plaguing of the Central Bankers’. But in the 15 years from his seminal 1953 essay to his occupancy of the AEA Presidency, Friedman’s case was transformed from minority to majority academic position. Friedman (1967, 133–4) estimated that in this period, the proportion of academic economists favouring increased flexibility of exchange rates had risen from less than 5 per cent to greater than 75 per cent.1 Others thought that towards the end, at least 90 per cent of academic economists accepted the theoretical soundness of the case for floating rates (Roosa 1967b, 177; Fellner et al. 1966, 5–6; Sohmen 1961b, xi; Halm 1970, vi-vii; Laffer 1973, 25). Friedman (1975, 162, 166, 178) modestly downplayed his own ‘powers of persuasion’, but noted that his ‘fellow believers’ in flexible exchange rates had grown from ‘a meagre platoon to an army’. Some of his opponents (such as Burns and Roosa) maintained their faith in a par value system. But within a remarkably short space of time they had been relegated to ‘the fringes of debate’ (Volcker and Gyohten 1992, 136, 154).
Robert Leeson

11. Flexible Exchange Rates as a Vehicle for Nixon’s Re-election

Abstract
With a witch-hunting reputation to live down, Nixon’s chances of winning in 1968 were regarded as ‘dim’. Both Edward Kennedy and Hubert Humphrey were in favour of the draft and Nixon’s narrow victory has been partly attributed to Nixon’s conversion to Friedman’s long-held advocacy of an all-volunteer army. This was the marriage of ideas and vested interests, transmitted to Nixon via the head of his research department, Martin Anderson (Anderson 1993, 173–4; Friedman 1977, 12; Friedman and Friedman 1998, 377–81; Safire 1975, 77). Shortly after taking office, Nixon was again exposed to Friedman’s proposal to take the wind out of the anti-Vietnam war rhetoric by announcing a timetable for the phasing out of conscription. Defense Secretary Melvin Laird was an advocate of Friedman’s position. Nixon scribbled: ‘Get Laird’s comment on this intriguing proposal’ (cited by Reeves 2001, 51, 77).
Robert Leeson

12. The Cross of Gold

Abstract
Appropriately for a story about revolution, the ghost of Lenin began to haunt deliberations. The IMF officials appeared to regard themselves as a politburo established to defend the Bretton Woods revolution. They were confronted by a counter-revolutionary who was aware of Keynes’s (probably fictitious) reference to Lenin’s dictum about debauching a currency as a prelude to revolution (Friedman 1968a, 174). Friedman (1988a, xix, xxiv) regarded the NEP as ‘a sharp break in the monetary regime adopted by the major Western countries’. But the NEPers were apparently unaware that they were rhetorically the heirs of Lenin.1 The first NEP was Lenin’s attempt to reach a temporary compromise with the domestic forces of capitalism; Nixon’s NEP fatally compromised the Bretton Woods system (Friedman 1972a [1971], 426). As frantic efforts were being made to revive the Bretton Woods system, Friedman advanced the prospects for international monetary revolution by pressing Nixon to debauch still further the currency of the Bretton Woods system, not through inflation but by undermining the role of gold.
Robert Leeson

13. Price and Wage Regulation, Exchange Rate Deregulation

Abstract
Burns (1969 [1967], 263) noted that ‘practice’ could often turn out to be ‘less orthodox’ than ‘rhetoric’.1 Indeed, alongside free market rhetoric there was also the rhetoric of ‘a social bargain or compact’ (De Marchi 1975, 348). On both sides of the Atlantic, support for price and wage controls was gaining ground. In Britain for example, there were rhetorical similarities between the rhetoric of the Conservative Party election manifestos of June 1970 and May 1979. After Friedman’s September 1970 Wincott Lecture, the Institute of Economic Affairs arranged for him to be ‘discreetly ushered in’ to see Edward Heath, the newly elected Prime Minister, for an hour’s talk.2 Friedman (19 September 1970) told Stigler that ‘Heath impressed me very favorably.… What he wanted to talk to me about was (1) floating exchange rate; (2) monetary policies for fighting inflation.’ Friedman reported that Heath indicated ‘a lack of interest in wage + price controls or guidelines or incomes policy’.3
Robert Leeson

Friedman and the Policy Revolution

Frontmatter

14. The Nature and Origins of Friedman’s Influence

Abstract
Since the death of Keynes, no economist has exerted a comparable influence to that of Friedman. He influenced economists’ methodology before he influenced their policy prescriptions: positive economics was the antidote to the use of ‘arbitrary’ principles such as Occam’s razor which sought to discriminate between ‘formal models of imaginary worlds’ (Friedman 1953, 283). As a policy analyst, Friedman displayed ‘inventiveness’ (Stigler 1998, 155). His advocacy of flexible exchange rates is a classic illustration of the process by which academic ideas become fertile.
Robert Leeson

15. Intellectuals

Abstract
Academic economists, like all scientists, exchange ideas and persuade each other in both formal and informal arenas. The informal process is inherently difficult to document. However, Friedman clearly devoted a significant amount of time and effort to persuading politicians, the general public and economists. For example, in the 1950s and 1960s few British economists exerted as much professional and political influence as Lionel Robbins. After the defeat of the 1945–51 Labour government, Robbins played an important role in formulating British macroeconomic and educational policy (Brittan 1964, 190–1).
Robert Leeson

16. US Senators

Abstract
Although he resisted formal Washington entanglements, Friedman was a highly political economist. Prior to the Nixon Presidency, his political influence was primarily exerted through informal channels. For example, in late January or early February 1951, he and six other Chicago economists issued a statement on ‘The Failure of the Present Monetary Policy’ (Friedman et al. 1951). The statement was sent to Senator Paul Douglas (1951, 1479, 1470) who read it to the Senate Congressional Record (22 February 1951). Douglas suggested that ‘Next to the questions of foreign policy and defense, the threat of inflation is perhaps the most serious one which we face.’ Douglas noted that the Fed was obliged to adopt an expansionary monetary policy to accommodate the Treasury’s desire to keep interest rates low so as to keep at a minimum the cost of government borrowings. Douglas suggested that the Fed should restrain the rate of growth of the money supply. On 2 March 1951, the Fed and the Treasury reached an ‘accord’ (Tavlas 1977).
Robert Leeson

17. The International Policemen

Abstract
Jacobsson (1959, 30–1) declared to the IMF 1959 annual meeting that ‘In all likelihood world inflation is over.’ He left the 1959 meeting with ‘no reason for pessimism about the outcome of our efforts’. After three years in office he had formed the ‘general impression … that a much greater unanimity had been reached’. Two years later, he declared that ‘We have saved the monetary system for the next generation’ (cited by Jacobsson 1979, 314, 316, 327, 330).
Robert Leeson

18. US Treasury Secretaries

Abstract
By the end of the 1960s, the case for floating exchange rates ‘began to be taken more seriously’ within the Bretton Woods bureaucracy (Volcker and Gyohten 1992, 46). Also, within the IMF there was thought to be a minority ‘team’ in favour of increased flexibility (Halm 1971, 14, 19).1 But after Nixon’s election victory, those who sought to patch up the Bretton Woods system were confronted by powerful adversaries in the US Treasury.
Robert Leeson

19. Chairmen of the Federal Reserve System

Abstract
Friedman tended not to ingratiate himself with central bankers. When invited by Lionel Robbins to deliver two lectures at the LSE in May 1952, Friedman (22 February 1952) explained to Robbins that he would like to use the opportunity to discuss ‘the question of automatic vs. discretionary monetary policy, in which connection I should display the Federal Reserve Board as the horrible example’.1 In his published work he was hardly more flattering: it would be ‘politically intolerable’ to have independent central banks because ‘Money is too important to be left to central bankers.’ Friedman (1968a [1962], 173, 178, 182) approvingly noted that central bankers ‘tended to oppose many of the proposals for extending the scope of government’ which he regarded as a ‘requisite for a free society’. Yet when he read the memoirs of prominent central bankers he realised how ‘thoroughly dictatorial and totalitarian’ some of them tended to be.
Robert Leeson

20. Within the White House

Abstract
Friedman attempted to both cultivate contacts and to neutralise the influence of opponents. This latter project is illustrated by his antagonistic exchanges with one of Nixon’s friends, Pierre Rinfret, an influential New York investment adviser, who had been under consideration both as a CEA member and as Treasury Secretary (Ehrlichman 1982, 258). Rinfret was sufficiently close to Nixon to be used by Burns as a messenger. According to Rinfret, in spring 1971 he was invited to have lunch with Burns so as to relay the message to Nixon that the Fed would ‘not be party to inflation’. But Nixon told Rinfret he was ‘about the hundredth person Dr Burns has asked to deliver the message’.1
Robert Leeson

End Game

Frontmatter

21. Secretary Shultz

Abstract
Shultz was a powerful figure inside the White House prior to becoming Treasury Secretary. One of the Governors of the Federal Reserve System observed that he was ‘the strongest economic voice in the Administration’ (Maisel 1973, 268). Safire (1975, 467) dated the beginning of Shultz’s domestic ascendancy (vis-à-vis Burns) from late 1969 (see also Ehrlichman 1982, 89, 92; Anderson 1990, 267; Solomon 1982, 220, 272; Rather and Gates 1974, 47; Evans and Novak 1971, 369).
Robert Leeson

22. Secretary Simon

Abstract
Shultz’s influence lived on in the system of sometimes managed floats. The summit meetings between the leading industrial nations at which efforts were occasionally made to influence currency outcomes had their origins in the Group of Five or ‘Shultz’s Library Group’ which first met in the White House in April 1973, immediately after the abandonment of the fixed exchange rate system. Shultz also acted as the American ‘sherpa’ at the November 1975 Rambouillet summit meeting which was part of the process that provided a legal basis for floating exchange rates (Volcker and Gyohten 1992, 126–7, 141; Shultz and Dam 1977a, 12; James 1996, 266–7). The 1976 Jamaica revision of the IMF Articles which legitimised floating was driven by free market sentiments (de Vries 1985b, 761).
Robert Leeson

23. Conclusion

Abstract
With the benefit of hindsight it is clear that neither adversarial position with respect to exchange rate regimes was fully vindicated by subsequent events. Behind the public analysis offered by the Bretton Woods administrators lay the fear that floating exchange rates would open a Pandora’s box which therefore had to be left closed. For example, in 1964, Roosa ‘emphatically’ and privately informed the recently appointed British Chancellor that it would be impossible to maintain the post-war system if a currency realignment was even attempted. Therefore, if the idea was merely ‘floated the subsequent failure would be disastrous for the stability of the international monetary system’ (Callaghan 1987, 171). Not surprisingly, after this Pandora’s box was opened, the policemen looked at the world ‘with an unusual mixture of hope and uneasiness’ (de Vries 1985a, 85).
Robert Leeson

Backmatter

Weitere Informationen

Premium Partner

    Bildnachweise