The Time of Keynes in the Times of Capitalism

Maria Bonomi, Cobra Norato, Woodcut, 96,70 cm x 96,70 cm, 1966.


Excerpt from newly released book

Keynes in Bretton Woods

In Chapter XXIV of the general theory, Keynes already calls for a more equitable distribution of the adjustment of balance of payments imbalances between deficits and surpluses, as a way to avoid the competitive blunders of “beggar your neighbor”. This meant facilitating credit to deficit countries and penalizing surplus countries. The purpose was to avoid “deflationary adjustments” and keep economies on the path of full employment.

It is not surprising that in the works prepared for the meetings that preceded the Bretton Woods reforms, Keynes took radical positions in favor of centralized and public administration of the international system of payments and liquidity creation. He imagined that capital controls should be “a permanent feature of the new postwar world economic order. To be effective, this control would likely involve strict exchange management gearing for all transactions even if the current account balance is generally open”.

A supranational institution – a central bank of central banks – would be in charge of carrying out the “conscious” management of the liquidity needs of international trade and the problems of adjusting the balance of payments between countries, surpluses and deficits. Keynes intended to avoid the recessive and asymmetric adjustment methods imposed on deficit and debtor countries by an international system in which liquidity or solvency problems depend on seeking the “confidence” of capital markets.

The Bretton Woods multilateral institutions – the World Bank and the IMF – were born with regulatory powers lower than those initially desired by Keynes and Dexter White, respectively representatives of England and the United States in the negotiations for the agreement, which basically took place between 1942 and 1944. Harry Dexter White belonged to the so-called left wing of the New Dealers and was therefore heavily investigated after the war by the Congressional Committee on Un-American Activities. Its initial plan foresaw the creation of a real International Bank and a Stabilization Fund.

Together, the Bank and the Fund would have an expanded capacity to provide liquidity to trade between member countries and would be more flexible in determining the conditions for adjusting balance of payments deficits. That scared the establishment American. Some because they understood that these powers seriously limited the radius of maneuver of American national economic policy; others because they feared the “inflationary” tendency of these liquidity and adjustment mechanisms.

Keynes proposed to International Clearing Union, a kind of Central Bank of central banks. A International Clearing Union would issue a bank coin, the bancor, to which the national currencies would be referred. The deficits and surpluses of countries would correspond to reductions and increases in central bank accounts (in bancor) next to International Clearing Union. A peculiarity of the Keynes Plan was the more equitable distribution of the burden of adjusting balance of payments imbalances between deficit and surplus. This meant, in fact, within established conditions, facilitating credit to deficit countries and penalizing surplus countries.

The Plan aimed, above all, to eliminate the disturbing role played by gold – or by any key currency – as the system's last reserve asset. It was a question not only of overcoming the inconvenience of subjecting universal money to the economic policies of the issuing country, but also of preventing the international currency from assuming the role of a dangerous agent of the “flight to liquidity”. This essential dimension of the Keynes Plan is often obscured by the prevailing opinion that emphasizes with greater emphasis the asymmetric character of balance of payments adjustments between creditors and debtors.

In the Keynes plan, there would be no room for the free movement of capital in search of arbitration or speculative gains: “No country can allow the flight of capital, either for political reasons, or to evade the tax authorities or even because of anticipations of the owners of wealth".

The reference to advances indicates that Keynes implicitly recognized the difference in quality between titles of wealth denominated in national currencies and those stamped with the seal of universal currency: they are imperfect substitutes. Faced with the hierarchy of currencies – the reserve currency is more “liquid” than the national currencies –, the uncovered parity theorem of interest rates does not work. With capital mobility, the financial markets proceed without alarm in the “arbitration” between internal and external interest rates, without interest rate convergence, discounting expected inflation differentials. In volume 2 of A Treat on Money, Keynes states that, with free movement of capital, “the interest rate of a country is fixed by external factors and it is unlikely that domestic investment reaches the equilibrium level”, that is, a value compatible with the best use of factors production available.

The proposal, as already mentioned, suffered serious restrictions from the United States, a country that emerged from the Second World War as a creditor of the rest of the world and a surplus in its commercial relations with the others. The weakening of the Fund, in relation to the original ideas, meant handing over the functions of liquidity regulation and lender of last resort to the Federal Reserve. The Bretton Woods monetary system was less “internationalist” than those who dreamed of a true world economic order would have liked.

In 1944, in the halls of the Mount Washington Hotel, in cramped Bretton Woods, Keynes's monetary utopia capitulated before the affirmation of American hegemony through the imposition of the dollar – anchored in gold – as a universal currency invested in the disturbing function of universal reserve of money. value.

Reexamined at a distance of more than seventy years, Keynes's and Dexter White's conceptions about the institutions and rules that should preside over a true international economic order seem to be inspired by a pessimistic view about the virtues of the self-regulated market and particularly negative in relation to the movement free of short-term capital. Even though the Bretton Woods system of rules and institutions has actually turned out to be just a shadow of the reality imagined by the two public figures, today nobody disputes the unique character of the period of post-war capitalist expansion, until the mid-1970s.

The monetary arrangement actually adopted in Bretton Woods survived the 1971 gesture – the decoupling of the dollar from gold – and the subsequent fluctuation of currencies in 1973. Third World debtors and plunged Europeans into “competitive disinflation”.

Since the 1980s, the Fund has committed its soul – if it has one – to financial openness. Thus, the crises in Mexico, Asia, Russia and Brazil were more than predictable. Only the foolish and unsuspecting – the ideologues of low monetarism – still insist on ignoring that solid fiscal “fundamentals” are not enough (and cannot be) to avoid an exchange rate and financial collapse after an exuberant and uncontrolled cycle of external debt.

In the case of the Korean economy, engulfed in the financial crisis of 1997/98, the good “fundamentals” contributed to build the conditions that led to the disaster. Investor “confidence” led to the appreciation of the national currency, the Won, to high current account deficits and, finally, to the “sudden stop” that caused the currency and banking crisis. On the eve of the 1997/98 Asian crisis, Korea enjoyed impeccable fiscal conditions: a nominal surplus of 2,5% and a public debt of less than 15% of GDP. The IMF mission, tasked with analyzing the situation of the Korean economy, praised its solid “fundamentals”.

In the exchange rate crises of the 1990s, led by the periphery (Mexico, Asia, Russia, Brazil and Argentina), US government bonds offered rest to capital tired of adventures in exotic markets. Thus, the torments of the exchange rate crisis and the crippled balance sheets of companies and banks were reserved for the unwary who believed in the promises that “this time will be different”.

In the aftermath of the Asian crisis, governments and the International Monetary Fund tried to convene meetings aimed at imagining remedies for “the asymmetries and implicit risks” in the current international monetary regime and in the practices of globalized finance. They called for a reform of the international financial architecture. The reaction of the Clinton administration – advised by Robert Rubin and Lawrence Summers, advisers to Barack Obama – was negative. The reformists put the viola in the bag.

The intended and never implemented reform of the international monetary system, or something similar, will not face the disturbances generated by the American decadence. It will settle accounts with the challenges engendered by the dynamism of globalization. Driven by the “dislocation” of large American corporations and anchored in the generosity of private finance in the United States, the productive and financial integration process of the last two decades has left as a legacy the unprecedented indebtedness of American “consumerist” families and the migration of the manufacturing industry. for “productivist” Asia. It is not by chance that China has accumulated 4 trillion dollars in reserves in the vaults of the People's Bank of China.

Even after the fall of subprime, it will not be easy to convince Americans to share in the benefits implicit in managing the reserve currency. At first, the current account deficits in the United States responded timidly to the devaluation of the dollar caused by the influx of money into the reserves of banks and other financial institutions. The policy of flooding liquidity aimed at acquiring, above all, long-term public debt securities (quantitative easing) initially boosted the devaluation of the dollar, but had little effect on its use as a denomination currency for commercial and financial transactions, despite the rise of the yuan in business among Asian countries.

In any case, the crisis demonstrated that the desired correction of the so-called global imbalances will require adjustment rules that are not compatible with the international monetary system in its current form, including the role of the dollar as a reserve currency. This does not mean predicting the replacement of the American currency by another, be it the euro or the yuan, but it means verifying that the future promises bumps and collisions in commercial and financial relations between nations.

* Luiz Gonzaga Belluzzo is a retired full professor at the Faculty of Economics at Unicamp. Author, among other books, of Capital and its metamorphoses (Unesp).


Luiz Gonzaga Belluzzo. The Time of Keynes in the Times of Capitalism. São Paulo, Countercurrent, 2021, 128 pages.

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