International Currency Experience and the Bretton Woods system: Ragnar Nurkse as Architect

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International Currency Experience and the Bretton
Woods systemRagnar Nurkse as Architect
Scott UrbanSt Antonys College,
Oxford Supervisors Valpy Fitzgerald Matthias
Morys
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My job

• Remind us what an outrageous exercise was the
  Bretton Woods plan
• How could the world agree it?(a) In the first
  place(b) In the teeth of severe birthing pains
• Answer In part, due to Ragnar Nurkse
• So what?

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"Bretton Woods"

• Bretton Woods is a New Hampshire resort
• Hosted a July 1944 meeting of 43 nations
• Agreed in principle a post-war Plan
• World Bank, ITO (GATT?WTO), IMF
• International monetary rules "the Bretton Woods
  system"

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International monetary system, 1870-2007
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International monetary system, 1870-2007
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International monetary system, 1870-2007
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International monetary system, 1870-2007
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International monetary system, 1870-2007
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Bretton Woods

• Mission Re-create the monetary stability of the
  classical gold standard 1870-1914
• Problem No going back. Popular electorates won't
  tolerate anything less than pro-active macro
  management

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Bretton Woods

• Solution Codify the world monetary system into
  international law
• Never in history had this been done
• International monetary system has never been
  consciously organised

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Gold standard

• Unilateral decisions to convert to gold
• Liberal external accounts ensured fixity
• Stable exchanges were natural outcome

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Classical gold std 1870-1914

• Coinage treaties geographically limited
• Latin Monetary Union 1865 "by far the most
  remarkable" (Nussbaum 1944)
• LMU troubled from the start required "repeated
  serious alterations" (ibid)

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Interwar gold std 1925-1931

• 'Multilateral' initiatives Genoa, 1922
  Economise on gold Only observed under League
  conditionality (Estonia, Hungary, Bulgaria,
  Greece, Danzig) London Monetary and Economic
  Conference, 1933 "old fetishes of so-called
  international bankers" (Roosevelt)
• 22 multilateral talks, conferences or initiatives
  of significance between 1918 and 1938 (LoN 1942)

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Interwar 'currency blocs'

• Sterling bloc Totally voluntary Free to
  come and go No rules or agreement (Nurkse
  1944) 'Bloc' just an appellation for
  pre-existing, natural grouping (Ritschl et al
  2003)

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Interwar 'currency blocs'

• Gold bloc At least a joint declaration (1933)
  But fractured almost immediately Poland,
  Italy, Belgium withdraw (1934)

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Tripartite Agreement 1936

• The nearest precedent to Bretton Woods 24-hour
  devaluation notification Otherwise, quite
  limited

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Bretton Woods Audacious

• Mid-20th Century Impressed by planning USA war
  economy Soviet Union industrialisation
  Keynesian ascendance
• Keynes was impressed by Germany (!)"Dr Schacht
  had stumbled on something new which had in it
  the genus of a good technical idea to (discard)
  the use of a currency having international
  validity and substitute for it what amounted to
  barter, not indeed between individuals, but
  between different economic units." (Keynes to
  Acheson, 1941)

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Bretton Woods Audacious

• "The new plans are of a complication entirely
  unprecedented in the history of international
  law" (Nussbaum 1944)
• "Different than anything the capitalist world had
  seen before" (Ikenberry 1992)
• An audacious bureaucratisation of international
  finance

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Bretton Woods Audacious

• "How many men, since the first tick on the clock
  of time, have handed down that wisdom in a
  thousand languages. We were, when we gathered at
  Bretton Woods actually better people. For a
  short space of three weeks we were making a
  better world by being better people."
• US Treasury Secretary Fred Vinson, 1946

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Bretton Woods Audacious

• "One of the greatest human achievements in
  history. Many, many men before us had tried to
  achieve a worldwide covenant on monetary and
  financial policy Today in this hour of elation
  we pay our humble tribute to them for their
  un-stinted devotion to this noble ideal. "
• Unnamed delegate of the Mexican Government

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Best laid plans

• European countries established convertibility of
  currencies only in 1961.
• "By the mid-1960s the par value system was for
  the first time operating in the great majority of
  countries" (Horsefield 1969)
• International monetary crises occurred "one after
  another" (Ibid)
• System collapsed in 1971 (1973)

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Why agree it? Why stick with it?

• Nurkse's International Currency Experience (1944)
• A seminal League of Nations publication
• The official analysis of interwar exchange-rate
  regimes and policies
• Depression seen as monetary phenomenon
• BW protagonists focused on money, not trade

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Why agree it? Why stick with it?

• International Currency Experience (1944)
• Uncanny overlap with the Bretton Woods system
• Main features

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Official exchange rates

• International Currency Experience p 117A
  network of exchange rates set up by simultaneous
  and coordinated international action would have a
  better chance of avoiding major initial strains
  and would serve as a better starting-point from
  which, in case of need, moderate readjustments
  could be made from time to time.

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Official exchange rates

• Article I. Purposes
• The purposes of the International Monetary Fund
  are
• iii. To promote exchange stability, to maintain
  orderly exchange arrangements among members, and
  to avoid competitive exchange depreciation.
• Article IV. Par Values of Currencies
• SEC. 3. Foreign exchange dealings based on
  parity.
• The maximum and the minimum rates for exchange
  transactions between the currencies of members
  taking place within their territories shall not
  differ from parity

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Monetary autonomy

• International Currency Experience, 15Policy
  coordination could scarcely be expected in a
  world in which many governments have become
  conscious of a greater responsibility for
  maintaining economic stability and social
  security. A synchronisation involving each
  country in booms and depressions originating
  elsewhere has therefore tended to become less and
  less acceptable.

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Monetary autonomy

• Article I. Purposes
• The purposes of the International Monetary Fund
  are
• ii. To facilitate the expansion and balanced
  growth of international trade, and to contribute
  thereby to the promotion and maintenance of high
  levels of employment and real income and to the
  development of the productive resources of all
  members as primary objectives of economic policy.

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Monetary autonomy

• Article IV. Par Values of Currencies
• SEC. 5. Changes in par values.
• f. In particular, provided it is so satisfied,
  the IMF shall not object to a proposed change
  because of the domestic social or political
  policies of the member proposing the change.

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Capital controls

• International Currency Experience, 141Even if
  changes in exchange rates were in future ruled
  out as a normal method of international
  adjustment, the mere memory of the interwar
  period -- the period of uncoordinated business
  cycle policies and flexible exchange rates -- may
  keep the disequilibriating tendencies alive, and
  may consequently necessitate restrictions on the
  international flow of funds.

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Capital controls

• Articles of Agreement
• Article VI. Capital Transfers
• SEC. 3. Controls of capital transfers.Members
  may exercise such controls as are necessary to
  regulate international capital movements, but no
  member may exercise these controls in a manner
  which will restrict payments for current
  transactions or which will unduly delay transfers
  of funds in settlement of commitments...

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'Adjustable peg'

• International Currency ExperiencePersistent
  disequilibria must be dealt with by a
  readjustment of exchange rates. (112)As a
  general rule, such exchange adjustments as prove
  necessary after the establishment of an initial
  system should be made by mutual consultation and
  agreement. It ought to be an elementary principle
  of international monetary relations that exchange
  rates should not be altered by arbitrary
  unilateral action. (141)

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'Adjustable peg'

• Articles of Agreement
• Article IV. Par Values of Currencies
• SEC. 5. Changes in par values.
• a. A member shall not propose a change in the par
  value of its currency except to correct a
  fundamental disequilibrium.
• b. A change in the par value of a member's
  currency may be made only on the proposal of the
  member and only after consultation with the Fund.

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Official liquidity

• International Currency Experience, 223If there
  are grounds for believing, however, that a
  balance of payments deficit has arisen for
  manifestly temporary or exceptional reasons, a
  country whose currency reserve is not sufficient
  to tide it over the emergency may well prefer
  exchange control to exchange depreciation. These
  are, of course, the conditions for which foreign
  credit operations constitute the obvious
  solution, and resort to exchange control would
  represent a failure not only of the monetary
  mechanism but also of the capital market to
  function.

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Official liquidity

• Articles of Agreement
• Article V. Transactions with the Fund
• SEC. 3. Conditions governing use of the Fund's
  resources.
• a. A member shall be entitled to buy the currency
  of another member from the Fund in exchange for
  its own currency subject to the following
  conditions
• i. The member desiring to purchase the currency
  represents that it is presently needed for making
  in that currency payments which are consistent
  with the provisions of this Agreement

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Scarce currency / punish the creditor

• International Currency Experience, 223-224It
  would be natural in such circumstances of serial
  accumulations to apply exchange rationing, if at
  all, to the centre of the disturbance. Rationing
  of the surplus country's scarce currency by an
  international agency might be a means for
  preventing the surplus country from draining away
  the liquid reserves of other countries and for
  preventing the spread of depression to other
  countries.

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Scarce currency / punish the creditor

• Articles of Agreement
• Article VII. Scarce Currencies
• SECTION. 1. General scarcity of currency. If
  the Fund finds that a general scarcity of a
  particular currency is developing, the Fund may
  so inform members and may issue a report setting
  forth the causes of the scarcity and containing
  recommendations designed to bring it to an end.

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My argument

• Nurkse's analysis was an intellectual buttress
  for the Bretton Woods system
• His description of the interwar period remained
  axiomatic for decades
• The book remains the definitive accounting of
  interwar money

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So what?

• With 35 years of floating, Bretton Woods coming
  into clearer view
• BW was an anomaly
• An heroic attempt to reconcile gold standard with
  demand management
• The final chapter for collateralised money
• Ending 2000 years of currency practice

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Birth of a new system

• From the ruins of BW arose a fiat-based
  international monetary system
• 'Fiat' currency inconvertible, un-backed
• Not "intrinsically worthless". Value is firmly
  seated in exchange function (Laidler)

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Birth of a new system

• International Currency Experience and its author
  are recalled for pegged ERs
• In fact, Nurkse's larger point in ICE is to
  advocate fiat money
• Called for abolition of cover requirements
• However Overlooked at Bretton Woods

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Birth of a new system

• Nurkse's ideal of a fiat-based system came 30
  years after Bretton Woods mtg
• Married to floating currency anathema for
  Nurkse
• Still evolving
• Reserve accumulation a response to
  capital-account crises
• The future Gradual transition to floating

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International monetary system, 1870-2007