IX. The post-war reconstruction

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IX. The post-war reconstruction

• (1945 1960)

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IX.1 The new beginning
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Basic framework (1)

• Economic
• War damages
• Great Depression experience
• Political
• Superpower position of the USA and the USSR,
  Britain definitely lost its dominance
• Europe strong influence of socialist movement

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Basic framework (2)

• Theoretical
• Keynesian teaching
• Planning
• War experience
• Technology (linear programming, computers)
• Soviet experience
• gt
• General acceptance of interventionist policies

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IX.2 Bretton-Woods System
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An urgent priority

• Inefficient gold standard one of possible
  explanations of Great Depression (see LVI)
• After the collapse of gold standard floating of
  major currencies
• Lack of any international coordination
• Competitive devaluations,
• Protectionism
• ? beggar-thy-neighbor policies ? prolonged
  recession
• WWII exceptional situation, no international
  coordination, neither in forex, neither in trade
• Since 1944 - Allied forces started to create a
  new international monetary system
• John Maynard Keynes and Harry Dexter White

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Institutions and intentions

• July 1944 - Bretton Woods conference (New
  Hampshire, USA), result Articles of Agreement
• 3 essential institutions
• International Monetary Fund
• World Bank
• Organization to promote cooperation in
  international trading arrangements
• Basic intentions
• Promote stability of the monetary system
• Provide financing for the reconstruction after
  the war and to the developing countries
• Support the free trade

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IX.2.1 IMF Goals and Tools

• Disastrous pre-WWII experience
• After WWII, main economic policy goals full
  employment, price stability, external balance
  with free trade
• B-W system based on a believe that gold exchange
  standard serves best these goals
• Need for flexibility in case of disequilibria
• Countries contributions to the pool of financial
  resources to provide funding (lending) to
  countries in need
• There could have been a devaluation, in case of
  fundamental disequilibrium

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Articles of Agreement summary (1)

• New Permanent Institution, IMF, as consulting
  body, executor of the Articles, lender to
  countries in case of BoP problems
• Gold exchange standard
• Each country establishes a gold price for its
  currency (par value), keep it within 1 per cent
  range in the short run
• Currency convertibility for the current account,
  capital controls for financial account
• Changes of par values (de/revaluations) only with
  the Funds approval and in case of fundamental
  disequilibrium
• Unfortunately, never precisely defined

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Articles of Agreement summary (2)

• Temporary imbalances were to be financed from
  domestic forex reserves (difference from pure
  gold standard, where those reserves were just
  monetary gold), in case of more substantial
  deficits, Fund was prepared to lend to individual
  countries
• Each country contributes to the Fund a certain
  quota according its size in the world economy
• Symmetry in treating all the currencies,
  including USD
• Theoretically possibility to de/revaluate USD
• Independent domestic monetary policies (provided
  they did not undermine other IMFs rules)
• It was assumed that after transitional period,
  currencies will become fully convertible,
  including the liberalization on financial account

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IX.2.2 International Bank for Reconstruction and
Development (World Bank)

• Helping to finance investment projects for
  reconstruction and development
• Long-term loan and technical assistance
• Guaranteeing and participating in loans by
  private investors
• Borrower need not be a government, but government
  must guarantee the loan, that must finance
  productive purposes, be used for original
  purposes and the borrower must be able to repay
• Borrower must prove that in the prevailing market
  conditions, he would be unable to obtain the loan
  from private sources
• Individual countries subscription of capital ?
  shares on total capital stock
• 2 paid in gold and USD, 18 in countries
  individual currencies, remaining 80 subject to
  call when Bank is required to meet its obligations

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IX.2.3 Missing leg international trade

• At Bretton-Woods, a third institution recommended
• Not created at the conference
• Preparatory discussions scheduled to start in
  1946
• In 1949 Havana conference GATT
• Some progress
• The full-fledged organization WTO, only in 1994

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IX.3 The immediate post-war reality
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Difficult years 1945-1947

• The economic situation of European countries
  worse than expected
• War damages, lack of resources of any type,
  adverse weather (namely winter 1946-7)
• Gold and USD reserves depleted
• Strong BoP deficits, reflecting huge need for
  imports and lack of ability to export
• dollar shortage
• War financing from USA (like Lend and Lease) or
  war relief international help (UNRRA) either
  terminated or insufficient
• Political threats from communism and too many
  very interventionists politicians in western
  Europe (F, D, etc.)

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Basic principles

• Note What follows is an easy ex-post
  description, in the post-war aftermath very few
  had such a clear view
• Liberalization of prices, accompanied by
  anti-inflationary policies
• In the post-war reality balanced budgets and
  removal of excess money, created by war economics
• Extremely difficult given the pressing
  reconstruction needs
• Balancing budgets
• ? BoP improvement ? chance to import raw
  materials and intermediate inputs, even under
  dollar shortage
• ? reduction in public investment ? lower
  growth, unless offset by private investment
• Need for strong trust in market economy
• No fear of excessive taxation and nationalization
• ? vicious political circle, call for actions that
  has not been previewed early 1945 and that did
  not enjoy full support in post-war political
  reality in Europe

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IX.3.1 Marshall Plan

• Official title European Recovery Program (ERP)
• June 5, 1947, US Secretary of State, George
  Marshall, speech at Harvard University
• Offered aid to any nation, did not specify any
  number, any other detail
• In reality directed towards Europe (originally
  including USSR), under the condition that
  recipient countries will be able to organize the
  rebuilding plan themselves
• Plan rejected by USSR and other countries under
  its influence

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Logistics

• US side
• Economic Cooperation Administration (ECA)
• US envoy in capital of each country that
  participated
• European side
• Participating countries A, B, DK, F, D, GB, GR,
  ICL, IRL, I, L, NL, N, P, S, CH, TR
• Coordinating agency Organization for European
  Economic Cooperation (OEEC)
• Acceptance of market economy principles and free
  trade
• Drawing the money
• Each country allocated the funds (money)
• OEEC (with local governments) allocated the money
  to particular projects, ECA arranged for transfer
  of goods, US supplier was paid in USD by ERP
• European recipient, including private firms, had
  to repay back (in local currencies, with delay,
  in installments, etc.)
• Crucial repayments in local currency, deposited
  by governments in so-called counterpart funds
  used for financing of further investment projects
  (Germany KfW)
• Final repayment only Germany and only about 1
  BUSD (1971)

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Basic numbers

• Period 1948-1951
• Total amount 12,741 MUSD

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Appraisal (1)

• Was it the most unselfish act in the history
  or an act of American imperialism?
• None of those extreme descriptions
• Removal of vicious circle above
• Relaxation of external (dollar) constraint
• Conditioned the aid on agreeing to decontrol
  prices and stabilize exchange rates and budgets
• Helped to reduce inflationary pressures
• It contributed to European reconstruction
• Was not a panacea, but provided immediate results

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Appraisal (2)

• It helped to oppose communism in Europe
• Proved to people that market economy can work
• Pushed the political equilibrium towards
  coalition that respected parliamentary democracy,
  market economy and rule of law
• Was very beneficial to US exporters and to US
  economy as such
• Important link to International Monetary System
  (see next subsection)
• It provided first lessons in European cooperation

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IX.3.2 The Fixed Rate Dollar Standard

• The immediate post-war reality asymmetry of
  international monetary system
• Both Europe and Japan strong demand for dollars
• Dollar, being the only convertible currency,
  quickly became a dominant, both as a reserve and
  intervention currency (instead of gold), inflow
  through Marshall plan
• Shift in the logic of the original B-W system
• US dollar fixed at 35 USD per oz. of gold, FED
  committed to keep and trade gold at this price
  (no foreign exchange intervention by the US)
• ExR rates of other member countries fixed to USD
  (by implication fixed ExR among all other
  currencies)
• International reserves of member countries held
  in USD, USD as a reserve currency, countries (not
  US) expected to intervene to keep the rates fixed

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Consequences (1)

• For Europe
• Countries (except US) limited in their monetary
  policies (long-term money supply must more or
  less follow US inflation)
• Adjustment to disequilibria via intervention with
  international reserves (mainly USD) ? need for
  keeping reasonable level of reserves
• To keep reserves ? limits of convertibility and
  of capital flows
• Europe convertibility only in 1958 and on
  current account only (regulation of capital
  flows)
• Limit current account imbalances by adjustment in
  fiscal policies

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Consequences (2)

• US
• USD as reserve currency, main task keeping the
  USD price of gold (35 USD per oz.)
• No way to de/revaluate USD
• Practice free trade with no BoP or exchange rate
  target
• Accept BoP deficits, if needed
• No capital controls, keep the US capital market
  open
• Compared to the rest of the world, US monetary
  policy independent, but provides a nominal anchor
  for all

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Asymmetry US as a center country

• US never had to intervene
• If N countries, N-1 fix their currencies ? Nth
  currency fixed by definition
• Corollary US did not have to be afraid that in
  case of BoP deficit, it will have to sacrifice
  international reserves to keep fixed ExR
• US was able to use monetary policy actively even
  when exchange rates are internationally fixed
• Advantage it can selfishly use it as a
  stabilization tool (e.g. in a Keynesian sense)
• Disadvantage US kept responsibility for world
  price level

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IX.4 Post-war policies
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IX.4.1 Lessons from 1945-1948

• The reform solution, hinted above (IX.3), was
  made feasible by
• Marshall plan
• Adjustment of B-W International Monetary Standard
  (IX.3.2)
• Necessary, but not sufficient conditions for fast
  recovery
• Immediate needs
• Investment, namely in sectors food, coal, steel,
  transportation
• Free trade and larger market (not limited by
  national boundaries)
• Need to keep international reserves (USD) enough
  to cover eventual deficits link to adjusted B-W
  system
• Social stability, keeping the political extremism
  out of parliamentary life and execution
  (governments)

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Four main lessons

• Understanding that Germany must be included into
  European economic mainstream
• The core is reform solution above, namely
• Monetary reform (to remove monetary overhang)
• Decontrol of prices, abolition of rationing
• Fiscal austerity
• Real wages under control, profits back into
  investment
• Keeping the real exchange rate competitive
• Looks very simply, but quite difficult to
  understand (and form a policy) and even more
  difficult to politically defend

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IX.4.2 Policy actions

• Systemic reforms, mainly price decontrols
• Most important example German monetary reform
  in 1948
• Ludwig Erhard, economist, politician, statesman,
  1948-1963 Minister of Economy, later, 1963-1966,
  German Chancellor, his reform immediately
  successful
• Other countries similar actions, albeit with
  different speed and different success
• European devaluations in 1949
• Large range (from 8 in Italy up to 53 in
  Austria), increase in competitiveness of European
  exports
• Both steps drastic measures, but triggered the
  growth. However, many other accompanying policies
  in different countries

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IX.4.2.1 Coordinated capitalism

• Neocorporatist structures negotiating bodies of
  labor (workers), management and governments
  (Tripartite), main goal
• keep the real wage growths under control
• reassure workers that profits will be plugged
  back into necessary investments
• Institutionalization - different countries
  various ways workers in supervisory boards
  (D,A), PBO (NL), Cooperative Body for Increasing
  Exports and Production (S), production
  committees (N), etc.
• Economic incentives to reach Tripartite
  agreement tax breaks, social security,
  unemployment insurance and benefits
• Trade-off between wage restrain (workers) and
  social security provisions (managers, governments)

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Regional cooperation (1)

• Unilateral opening of European economies
  unfeasible danger of quick loss of forex
  reserves
• Access to large (multi-country) market
• Concentration of resources (human, material,
  financial) to sectors with highest priority
  again beyond the possibility of a single country
• ? all this led to the creation of several crucial
  regional institutions

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Regional cooperation (2)

• Marshall Plan coordination OEEC
• Later, till today, OECD
• The first school of European bureaucrats
• European Payments Union (EPU)
• Funded by Marshall Plan, countries had to accept
  liberal policies
• Multilateral cancellation of bilateral imbalances
• Credits to finance temporary deficits
• Mechanisms, forcing the countries to accept
  corrective policies
• Proved as successful in dealing with Europes
  reserve crisis in late 1949, via support to BoP
  of D and NL

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Regional cooperation (3)

• European Coal and Steel Community (ECSC)
• 1951 F, D, I, NL, B, L (not UK!)
• Coordinated the development of coal and steel
  industries
• The first truly supra-national European
  institution, with bodies that resemble todays EU
• In 1969 merged into EC

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Complementing the market

• Apart of many common policies above, there was
  the crucial coordination question will market be
  able to quickly direct the necessary resources
  into most demanding sectors without the support
  of the Government?
• Mostly the answer was no and various countries
  provided solutions in different ways

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Nationalizations and state ownership

• Nationalizations
• 1945 - UK (also Czechoslovakia), in 1955 A
• Confiscations and from pre-war period (F)
• By definition (D)
• Concentration of production/financial
  conglomerates either in state hands or under the
  control of few private groups
• France control of banking system and most
  important firms to direct credit to particular
  sectors
• Italy state-owned holding companies (IRI, ENI)
  preferential credits, if they invest into heavy
  industries
• Spain copied the Italian example some years
  later
• Sweden Wallenberg family

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Indicative planning (1)

• In the situation immediately after the war, it
  could have complemented markets
• Setting targets, that markets were not quick to
  achieve
• Directing the resources to four most important
  sectors above
• Later, after 1952, it extended the coverage to
  many areas that could have been better without
  state intervention
• To increase employment
• To ensure conditions for long-term growth
• To improve export performance of the country
• To develop the infrastructure
• To protect domestic industries and help to create
  strong national companies
• To support certain structure of energy resource
  utilization (e.g. nuclear vs. coal)
• It had some positive impact in the first years of
  post-war reconstruction

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Indicative planning (2)

• Complements or distorts the markets?
• Competition vs. national monopolies
• Free trade suffers
• Bureaucracy
• Price distortions
• Financing, budget deficits
• Short-term gains vs. long-term losses
• The main problem
• Selective, targeted policies tax relieves,
  cheap credits, export subsidies, direct
  subsidies, structured tariffs, etc.

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National diversities

• Institutional differences different planning
  agencies
• F Commisariat Général du Plan
• NL Central Planning Bureau
• Japan Economic Planning Agency (EPA) and
  Ministry for International Trade and Industry
  (MITI)
• Differences in social, political and cultural
  aspects
• D ordoliberalism
• Scandinavian countries strong feeling of social
  solidarity from pre-war years
• NL scientific and mathematical methods of
  planning
• Japan strong discipline, respect of the
  authorities
• All countries strong feeling that hard work,
  saving and investment is needed ? between
  1945-1952 common feeling and common approach
  among different groups of societies

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IX.4.2.2 Personalities

• F Robert Schuman, Jean Monet
• D Konrad Adenauer, Ludwig Erhard
• B Paul-Henri Spaak
• I Alcide de Gasperi
• NL Jan Tinbergen

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IX.5 Conclusions

• Note Full evaluation of the period 1945-1969
  will be provided in one of the later Lectures
• 1945-1952 very difficult, extraordinary period,
  that need extraordinary measures
• Core of the solution market oriented reforms
  monetary reform and price liberalization
• Period of strong state intervention
• Probably justified in this short period
• Seeds of future problems
• Most countries extremely fast restart of the
  economic machine
• See data from LI

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Literature to Ch. IX

• On Bretton-Woods
• Krugman, Obstfeld, Chapter 18, pp. 499-500
• Solomon, R., The International Monetary System
  1945-1976. HarperRow 1977 (excellent survey,
  based on personal experience, also useful as to
  Marshall Plan)
• General
• Eichengreen, B., The European Economy Since 1945.
  Princeton University Press, 2007, Chapters 1-4
• On different national approaches after WWII
• Gardner, Stephen H., Comparative Economic
  Systems. The Dryden Press, 1988
• Marshall Plan
• Behrman, Greg, The Marshall Plan, Aurum Press
  Ltd., 2008