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March 2010
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Class Materials for Lecture 17
Brief Outline of Topics Covered in Lecture 17:
- The Monetarist School - Wicksell and Fisher (class notes - cont.)
- The Keynesian School - John Maynard Keynes (ch. 15)
John Maynard Keynes (right) and Harry Dexter White at the Bretton Woods Conference
Additional Reading:
[Note: This was written in 2006] A colleague who was believed to be the last surviving U.S. economist involved in the Bretton-Woods negotiations, Ray Mikesell:
UO professor, Bretton Woods economist, dies at age 93, by Rebecca Nolan, The Register-Guard, 2006: A University of Oregon professor, believed to be the last surviving economist from the 1944 Bretton Woods conference that led to the creation of the World Bank and the International Monetary Fund, died Tuesday at his home in Eugene. Raymond Mikesell died of age-related causes. He was 93. ...
Toward the end of World War II, he became an adviser to Assistant Treasury Secretary Harry Dexter White, who led U.S. efforts to shape the world's economy after the war. Mikesell was present at the Bretton Woods conference, where White and the British economist John Maynard Keynes negotiated the design of the World Bank, the IMF and the General Agreement on Tariffs and Trade. The institutions funded the European recovery and laid the foundation for the postwar economic expansion.
Mikesell provided data for White to use against Keynes' attempts to preserve British interests. ... [Update: NY Times story]
Among all countries involved in the Bretton Woods negotiations the last surviving economist is, as far as I'm aware, Dr. Jacques J. Polak who was a member of the Netherlands delegation. He is 92, lives in Washington, D.C., and maintains an office at the IMF where he continues to write.
One of Ray's many books, Foreign Adventures of an Economist written in 2000, gives details of his experiences in all sorts of negotiations and advisory capacities. One part of the book details his experiences at Bretton Woods and it's a history worth preserving. Ray's main lasting contribution at the conference was to determine the IMF and World Bank formula used to set quotas:
This exercise required many calculations with a 1940s-style calculator, using a number of variables and weights for each country. If I had had access to a modern computer, I could probably have come up with a better formula. ... My formula was ... used as a basis for determining the IMF and World Bank quotas at Bretton Woods for most member countries represented at the conference. Thereafter, it was used in a somewhat revised form for new members joining the Fund. In fact, the formula is still used, but with special adjustments for individual countries. I take no pride in having authored the formula and sometimes apologize for it as my claim to infamy! It has continued to be used in large part because the Fund wanted to apply the same conditions in determining quotas for new members as were applied to the original members.
The book has a lot of interesting detail and insider information on the negotiations, and I've included the pdf's for the chapters on Bretton-Woods below for anyone who is interested. Here's one small section:
A Note on Personalities
John Maynard KeynesAs a young academic who had studied and taught both The Treatise on Money and The General Theory I was awed by Keynes and grateful that I could sit in meetings with him. Although he fought hard for positions he regarded as important for Britain's welfare, his economic arguments were academic and dispassionate. Keynes could accept philosophically the economic advantages of multilateral trade while continuing to defend a discriminatory sterling area in terms of Britain's national interest.
There was a sharp contrast between the literary quality of Keynes's ICU proposal and the legalistic formulation of the July 1943 version of the White plan. Keynes displayed arrogance in the elegant language of an educated British lord. He disliked the style and format of the Fund's Articles of Agreement. He said they were written in Cherokee, and he blamed the language on the Treasury Department's lawyers. Keynes frequently complained that Americans were too dependent on attorneys, and once suggested that "when the Mayflower sailed from Plymouth, it must have been entirely filled with lawyers."
Keynes was capable of displaying temper and once threw one of White's drafts to the floor, but he usually expressed his anger through sarcasm. He always had an air of dignity and did not join the revelry at the Bretton Woods nightclub. I never saw him in sport clothes. Nevertheless, he was approachable. Junior members, such as myself, were able to talk privately with him, and I always found him willing to answer my questions. If we took too much time, however, Lady Keynes would tiptoe over to protect him from becoming too tired. Those of us who were privileged to shake his limp hand on the train from Savannah to Washington following a light heart attack were left with the memory of saying farewell to a truly noble man.
Harry White
Personalities played an important role in the Bretton Woods debates and in the final outcome. I saw White in numerous meetings and on dozens of other occasions when we talked alone in his Treasury Department office. His Monetary Research staff was largely composed of former academicians, and many of us returned to universities after the war. The staff was intensely loyal to White, and he respected us as scholars and strongly supported us even when he thought we had made mistakes. I do not recall White's embarrassing any staff member by dressing him down, but he showed another side when he was involved in negotiations outside the Treasury Department. He was often brusque, even crude, in his meetings with Keynes and the British delegation.
When annoyed, he sometimes cynically addressed Keynes as "Your Royal Highness" or "Your Lordship." Lord Robbins, who participated in many of the pre-Bretton Woods meetings but was not close to White, described White well in his book Autobiography of an Economist:
It is true that White was not a very beautiful character. He was brash, truculent, and, I suspect, somewhat unscrupulous where his own interests were concerned. In his younger days he had been the victim of academic unemployment, possibly due to the discreditable anti-Semitism which at that time tended to affect the policies of the great university with which he had been associated; and I am fairly clear that he was determined that henceforth Harry White should not be worsted in the struggle for survival-- or eminence. But that he was in any way associated with the groups in the United States who actively wished harm or wished to exploit our [Britain's] position of weakness will not stand up to examination for a moment. (Robbins, 1971).
White often expressed to his staff his hostility toward the State Department, with which he frequently struggled for power within the U.S. government. Like Morgenthau, he wanted the Treasury Department to be the center of postwar economic policy and planning. This helps to explain the comprehensive nature of the original White plan. International financial institutions were not a high priority in the State Department; without White's zeal, there probably would not have been a Fund or a Bank. The Bretton Woods institutions might not have come into being if they had not been well advanced before the end of the war, since by then there was a plethora of immediate economic problems that these institutions were not equipped to handle.
White sought to conduct his own foreign policy independently of the State Department. He dealt directly with foreign officials in Washington, and members of the Monetary Research staff in American embassies in Allied countries, including myself, secretly reported directly to White without going through their embassies. White sometimes used the press to promote his policies that were in opposition to those of the State Department. On one occasion, while I was alone with him in his office, he dictated over the phone a long, top-secret State Department statement to a reporter. I do not know the reasons for White's antipathy toward the State Department, but it was not directed at individuals since he had close relations with some of them. I believe it was a reaction to the State Department's traditional insistence that it have commanding responsibility over foreign policy.
White believed that the U.S. government should have sought closer cooperation with the Russians. Through certain members of his staff, he provided information to and discussed policy with Soviet embassy officials. These relations were later discovered by the FBI and led to White's dismissal from the government, but they were not known to most of us in Monetary Research.
Many people have asked me if White was a Communist. I am convinced that he was not. White believed in free markets and capitalism and devoted his energies to planning for a postwar world with free and nondiscriminatory trade and payments. He was, however, quite willing to deal with Communist officials to achieve his objectives. The Soviet Union shared his political objectives regarding postwar Germany, and he believed that Soviet officials would support the Fund and the Bank proposals. He did not share the pervasive fear that the Communist ideology would spread to the rest of the world, or that the Soviet Union might dominate the world by military conquest. He believed that a Communist state could operate under a system of nondiscriminatory trade rules, abiding by the trade and exchange obligations of his plan.
White's associates who were later accused of being spies for the Soviet Union -- Sol Adler, Frank Coe, and Harold Glasser -- never indicated to me that they were not completely loyal to the United States or that they did not believe in a democratic capitalist society. I knew them so well personally that it is difficult for me to believe they could have concealed communist ideology from me. Although they may have had some association with the American Communist movement in their youth, as did many of my college acquaintances in the 1930s, I believe that the accusations directed against them arose from White's propensity to carry on direct relations with the Soviet government outside regular diplomatic channels. If these same activities had been carried on with the British or Canadians, they would have been acceptable. White and his closest associates simply ran their own foreign ministry.
A few weeks before White's death, he and I were speakers at a conference of the American Academy of Political and Social Science in Philadelphia. After the evening meeting on April 19, 1947, I spent a couple of hours with him in the lobby of the Benjamin Franklin Hotel. He was in a reflective mood, and we reminisced about the events leading to the creation of the Bretton Woods institutions. White had already been compelled to give up his position as the U.S. executive director of the Fund. He had been working as a consultant to the Chilean government and had recently returned from Santiago. He was scheduled to testify before the House Committee on Un-American Activities, but he spoke very confidently of being able to disprove the charges against him and appeared to look forward to the opportunity. White was charged with providing confidential information to the Soviet Union, but I have never believed he gave any information that was harmful to U.S. national interests. White did speak of his heart condition and, when we parted, he apologized for taking the elevator rather than walking the two flights to where both of our rooms were located. Some say he committed suicide to avoid testifying before the House committee. I do not believe it.
March 02, 2010
Class Materials for Lecture 16
Brief Outline of Topics Covered in Lecture 16:
- The Neoclassical School ‑ Marshall Ch. 11 [cont.]
- The Neoclassical School ‑ Walras (pgs. 265-283)
- The Monetarist School - Wicksell, Fisher, and Hawtrey (class notes)
Irving Fisher (1867-1947)
Additional Reading
Knut Wicksell: Economist Knut Wicksell made his name among the Swedish public with a series of provocative lectures on the causes of prostitution, drunkenness, poverty, and overpopulation. A malthusian, the young Wicksell advocated birth control as the cure for these social ills. His image as a radical social reformer did much to attract the attention of the press and the Young Socialists with whom he sympathized. But his rejection of marx and marxism limited his popularity.
Wicksell was not so much an innovator as a synthesizer. His integration and refinement of existing microeconomic theories helped earn Wicksell recognition as the “economists’ economist.” In his 1893 book, Value, Capital, and Rent, Wicksell analyzed and praised the Austrian theory of capital as elaborated by Eugen von Böhm-Bawerk. In the first volume of his Lectures on Political Economy Wicksell concluded that Böhm-Bawerk’s idea of roundaboutness did not make sense, and agreed with Irving Fisher that waiting was a sufficient explanation for interest rates.
Wicksell also laid out marginal productivity theory, the theory that the payment to each factor of production equals that factor’s marginal product. Economists Philip Wicksteed, Enrico Barone, and John Bates Clark had already elaborated this theory, but Wicksell’s exposition of it was superior. Wicksell also emphasized that an efficient allocation of resources is not necessarily just, because the allocation depends on the preexisting distribution of income, and nothing guarantees that this preexisting distribution is just.
Wicksell is best known for Interest and Prices, his contribution to the fledgling field now called macroeconomics. In this book and in his 1906 Lectures in Political Economy, volume 2, Wicksell sketched out his version of the quantity theory of money (monetarism). The standard view of the quantity theory before Wicksell was that increases in the money supply have a direct effect on prices—more money chasing the same amount of goods. Wicksell focused on the indirect effect. In elaborating this effect, Wicksell distinguished between the real rate of return on new capital (Wicksell called this the “natural rate of interest”) and the actual market rate of interest. He argued that if the banks reduced the rate of interest below the real rate of return on capital, the amount of loan capital demanded would increase and the amount of saving supplied would fall. Investment, which equaled saving before the interest rate fell, would exceed saving at the lower rate. The increase in investment would increase overall spending, thus driving up prices. This “cumulative process” of inflation would stop only when the banks’ reserves had fallen to their legal or desired limit, whichever was higher.
In laying out this theory, Wicksell began the conversion of the old quantity theory into a full-blown theory of prices. The Stockholm school, of which Wicksell was the father figure, ran with this insight and developed its own version of macroeconomics. In some ways this version resembled later Keynesian economics. Among the young Swedish economists who learned from Wicksell were Bertil Ohlin, Gunnar Myrdal, and Dag Hammarskjöld, later secretary general of the United Nations.
For much of his adult life, Wicksell depended on several small inheritances, grants, and the meager income earned through public lectures and publications. Not until 1886, when he was awarded a major grant, did he begin to pursue economics seriously. With financial support secured, Wicksell traveled to universities in London, Strasbourg, Vienna, Berlin, and Paris. By 1890 Wicksell had returned to Stockholm, but being “too notorious” and unqualified to teach—he held degrees in mathematics, but economics instructors were then required to have formal degrees in law and economics—he returned to freelance writing and lecturing.
In 1900, when Wicksell was forty-eight years old, he was granted his first teaching position at the University of Lund, which he retained until his retirement in 1916. His quirky habits, friendly demeanor, and willingness to actively defend his beliefs earned him respect and popularity among his students. Throughout his lifetime Wicksell never lost his penchant for radicalism. He forfeited a professorship by refusing to sign the application with the conventional “Your Majesty’s most obedient servant.” In 1910 he was jailed for two months by the Swedish government for a satirical public lecture he delivered on the Immaculate Conception. In spite of his disdain for ceremony and fanfare, his common-law widow consented to an extravagant funeral upon his death at age seventy-four.
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