If I have seen further it is by standing on the shoulders of giants.

Wednesday, September 14, 2011

Nasar: How to Prevent Economic Crises

Unlike the movies, life rarely permits second takes. But the Second World War gave John Maynard Keynes, the patron saint of government activism, and Friedrich Hayek, the Cassandra who warned of the state’s destructive potential, just such opportunities.

During the Blitz, this odd couple was said to have shared fire-warden duty atop the soaring roof of Kings College’s chapel, an apogee of Gothic architecture that stood in the crosshairs of Nazi bombers. The story is likely apocryphal but its symbolism holds true. Despite their differences, both men were committed to the defense of Western civilization, and both were determined that the West would do better than it had last time in laying the foundations of a lasting peace.

When Hitler launched his mad world conquest, Keynes was no longer the slim young civil servant he had been 20 years earlier, someone who could poke fun at his superiors but was too remote from power to persuade them. Middle-aged and paunchy now, saddled with a “wonky” heart, he had become Britain’s de facto wartime treasurer and postwar planner and was in a position to influence the economic future.

Bretton Woods

In July 1944, 10 months before Germany’s surrender and 15 before Japan’s, Keynes was in a resort in the White Mountains of New Hampshire. The purpose of the Bretton Woods conference was to revive world trade when the war ended, stabilize currencies and deal with war debts and frozen credit markets. The war would leave much of the world significantly poorer, and countries would need to be able to earn their way back to prosperity. In the broadest sense, salvage meant rebuilding and reconstruction, moving back toward pre-1913 globalization, but without reviving the pre-World War I assumption that the world’s economic machinery worked automatically.

For the West, Bretton Woods meant avoiding the mistakes of the interwar era -- the very lesson that Marxists claimed capitalists could never learn -- and restoring lost moral and material credibility. Economic chaos after World War I had convinced Keynes that economic stability was a key to political stability, and economic growth was a necessary if not sufficient condition for the long-run survival of the West. Modern societies could not endure economic breakdowns any more than great cities could run without electricity or water.

By 1943, it was obvious to Keynes that the U.S. and Britain would design the postwar economic order together, but that America’s financial strength and Britain’s weakness meant that the U.S. would have the last word on all important matters. Determined to deploy his intellectual capital as a counterweight to American financial clout, he drafted the British proposal and got it out first.

International Monetary Fund

Keynes envisioned a United Nations of international finance that would provide a framework for cooperation as global lender of last resort and arbiter of trade disputes. It would operate according to agreed-upon rules and procedures to avert financial crises, trade wars and depressions such as those in the interwar era. By marshalling international cooperation to deal with postwar debts and stabilize currencies, the West would not be driven, as it had been between the wars, to embrace the beggar- thy-neighbor policies that had exacerbated the Great Depression. On the sea journey to the U.S., Keynes drew up blueprints for the International Monetary Fund and the World Bank.

Unlike British thinkers in the Victorian era who championed free trade, Keynes and his American counterpart, Harry Dexter White, the U.S. Treasury’s second in command (and a KGB agent), no longer believed that the world naturally tends toward peace and progress. International cooperation was required. The alternative was unthinkable.

Allied political leaders had also learned from experience that peace depended on economic revival. As President Franklin Roosevelt put it, “Economic diseases are highly communicable. It follows therefore that the economic health of every country is a proper matter of concern to all its neighbors, near and distant.”

The Bretton Woods conference was Keynes’s idea, but White chose the Mount Washington Hotel. When the conference got under way with delegates from 44 countries, Keynes and White were in charge. Keynes took little trouble to disguise the fact that he was ramming his views down the throats of the banking committee that he chaired. The U.S. Treasury Secretary Henry Morgenthau had to go around to Keynes’s suite and ask him to “please go slow and talk louder and have his papers in better arrangement.”

Keynes, typically, was more efficient than democratic. He had accomplished what he had wished to accomplish as a much younger man, and now he was exhausted and eager to get away. When he arrived at the banquet to give the final speech, everyone stood up, silently, until he made his way to the dais.

Continue reading - Bloomberg - Nasar: How to Prevent Economic Crises

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