Policy Research in Macroeconomics

The IMF – our sleeping beauty?

In Christine Lagarde’s Richard Dimbleby lecture (3 February 2014), ‘A New Multilateralism for the 21st Century’, the Managing Director of the International Monetary Fund set out a bold vision of multinational cooperation and an agenda for monetary reform. Closing, she argued that the financial system should “serve rather than rule the real economy”. This is presumably a deliberate echo of one of America’s greatest monetary reformers, Abraham Lincoln: “Money will cease to be the master and will then become the servant of humanity”. Lincoln’s words have been an inspiration to all progressive political forces, most recently in Britain, the Labour Government of 1945-1951.

Moreover Lagarde celebrated the multilateralism at the end of the second world war, and in particular the role of the British economist J. M. Keynes, the multilateralism that set the way to the instigation of the IMF itself and other multinational institutions, and to the detailed practical arrangements that permitted the prosperity of the post-war age.

While Lagarde’s ambitions are far-reaching and greatly encouraging, it is vital to understand the relations between these two ideals: of monetary reform and of internationalism, and their relevance today.

The Bretton Woods conference originated in President Roosevelt’s call for “a bold, forthright, and comprehensive discussion looking forward to the construction of… a ‘free, fertile economic policy for the post-war world’ excluding nothing in advance” (XXIII, p. 228).[1]

Keynes grasped the opportunity to consign the terrible economic policy mistakes of the inter-war period permanently to history. From his rejection of the gold standard exchange system, he had come to understand that any arrangements to facilitate international trade should be compatible with countries having autonomy to set their own monetary and fiscal policies. These domestic policies should then be used to foster a high level of aggregate demand, achieved fundamentally by the aiming of monetary and debt management policy at cheap money, that is, at permanently low interest rates.

Central to the final Bretton Woods agreement was enabling a world of capital control:

“Freedom of capital movements is an essential part of the old laissez-fairesystem and assumes that it is right and desirable to have an equalisation of interest rates in all parts of the world. It assumes, that is to say, that if the rate of interest which promotes full employment in Great Britain is lower than the appropriate rate in Australia, there is no reason why this should not be allowed to lead to a situation in which the whole of British savings are invested in Australia, subject only to different estimations of risk, until the equilibrium rate in Australia has been brought down to the British rate. In my view the whole management of the domestic economy depends upon being free to have the appropriate rate of interest without reference to the rates prevailing elsewhere in the world. Capital control is a corollary to this. (XXV, p. 149)”

In terms of exchange policy, the agreement fell short of the ideal in Keynes’ own ‘Clearing Union’ scheme, but still led to an era of relative exchange stability.

Following his immense contribution to the Bretton Woods conference, Keynes then devoted his energies to persuading the British policymakers, politicians and public alike–all deeply sceptical of US motives–to accept these reforms. In this he was successful, but even only a few months later he was much more cautious.

Keynes greatness extended far beyond economics and statesmanship. He had been important to a revival of London ballet, and was expected to escort the King and Queen to the Royal box for Tchaikovsky’s Sleeping Beauty, chosen for the post-war opening of Covent Garden (in fact he was only able to join them for the third act). When in March 1946 he spoke as the British delegate to the inaugural meeting of the governors of the IMF and World Bank in Savannah, he had this performance in mind:

“I am hoping that Mr Kelchner [the convenor] has not made any mistake and that there is no malicious fairy, no Carabosse, whom he has overlooked and forgotten to ask to the party. For if so the curses which that bad fairy will pronounce will, I feel sure, run as follows: ’You two brats shall grow up politicians; your every thought and act should have an arrière-pensée; everything you determine shall not be for its own sake or on its own merits but because of something else.’

If this should happen, then the best that could befall–and that is how it might turn out–would be for the children to fall into an eternal slumber, never to waken or be heard of again in the courts and markets of Mankind. (XXVI, pp.216-17)”

Ultimately he feared that the institutions would be in thrall to the bad fairy of US politics, and, as a result, vested interests. Only a little over a month later, Keynes was dead.

His internationalism was for a scheme that permitted a world of individual nations, but connected through trade and economic cooperation. No matter how imperfect the outcome of these conferences, we can now see that it took some time for Keynes’ fears to be realised. His post-war settlement established the conditions for the prosperity, near full employment, relative stability, narrowed income distribution and social advance that is now know as the golden age.

But this world was dismantled, most obviously with the abandoning of the Bretton Woods exchange regime in 1971, then with the removal of capital controls at the end of that decade and the consequent abrupt and sustained rise in global interest rates.  The IMF and other Bretton Woods organisations became champions of a globalization of finance and industrial capital that they were originally established to keep at bay, a globalization that would consequently reverse all the hard fought economic and social gains of the post war age.

We might wishfully consider Lagarde’s speech as amounting to recognition on the part of global policymakers of this grave failure.

But these are not new problems. They are old problems; they are the problems that Keynes and his contemporaries identified and overcame. She is right that “the international monetary system has travelled light years since the original Bretton Woods system”. But this journey was backwards, not forwards. The financial system she seeks, “that serves the productive economy rather than its own purposes”, is that Bretton Woods system. It is time to rouse the sleeping beauty that lies in her own institution.

[1] Quotations are taken from the Collected Writings of John Maynard Keynes, Volumes XXIII, XXV and XXVI, concerned with the external financing arrangements for the British war effort and the debates on post-war international architecture.

Leave a Reply

Your email address will not be published. Required fields are marked *

This website collects cookies and analytic data. To use our website you must consent.
For more information read our Privacy Policy.