The Limits of Transparency: Ambiguity and the History of International Finance 9781501722189

Citation preview

THE LIMITS OF TRANSPARENCY

A book in the series CoRNELL STuDIEs IN MoNEY

Edited by

Eric Hellciner and Jonathan Kirshner

Ambiguity and the History of International Finance

Jacqueline Best

Cornell University Press IT HACA A ND LONDON

Copyright © 2005 by Cornell University All rights resen-cd. Except for brief quotations in a review, this hook, or parts thereof, must not be reproduced in any I(Jrm without permission in writing from the publisher. For inliH·~ mation, address Cornell University Press, Sage I louse, 512 East State Street, Ithaca, New York q85o. First published 2005 by Cornell University Press First printing, Cornell Paperbacks, 2007 Printed in the United States of America I.ilnmy ofCongrt.u Cataloging-in-Publimliou Data

Best,.Jacqueline, 1970The limits of transparency: ambiguity ancl the history of international finance I Jacqueline Best. p. cm.-(Cornell studies in money) Includes bibliographical references and index. ISBN-13: 97R-!\ WOODS YEARS,

19-f4-1958

1751

moving, or whether it really exists. Nevertheless all of us here must cope with this mysterious phenomenon. 4 '' By the end of the year, after considerable debate and negotiation, the State Department submitted legislation to Congress for the European Recovery Plan (the official name of the Marshall Plan).ln the United States, the key overseeing organization was the Economic Cooperation Administration (ECA), while in Europe, the Organization for European Economic Co-operation (OEEC), representing European governments, was closely involved in the allocation of the $12 billion of Marshall Plan aid that was distributed over the next four ycars. 46 The ECA initially allocated Marshall Plan funds on the basis of estimated balance of payments deficits. These funds helped to finance imports both from the United States and from within Europe itself-providing a hard currency intermediary to allow products from one country to be sold in another, even where bilateral currency agreements had broken down. The funds worked to inject badly needed liquidity into the European system through a process that was, if anything, more generous than that proposed by the Bretton V\'oods agreement-at least insofar as it was a system of grants rather than of loans. However, these funds did not come without a price of some sort-in this case, an emphasis on domestic economic adjustment. For every dollar of Marshall Plan aid received, participating countries were required to set aside an equivalent amount of domestic currency. Five percent of these "counterpart" funds were set aside for ECA expenses and purchases of raw materials; the remainder could not be used without the consent of the ECA. The l'vlarshall Plan filled a crucial gap in postwar financial governance, providing the funds that the IMF lacked, bridging the dollar gap in Europe, and compensating for the capital flight caused by the failed attempt at convertibility in 1947· Although the plan's funds did not last long enough to provide for the full recovery of Western Europe, they helped to turn those economies around. If we are to understand ·what made the Marshall Plan successful, we must first answer three key questions regarding the nature of the plan. Was it largely an expression of U.S. hegemony, as many have suggested-an attempt to remake Europe in the American image? Was it an orthodox economic plan, like those of 1947 and 1949, or did it reflect a more Keynesian approach to economic reconstruction? And, finally, how did the Marshall Plan respond to the challenges of managing ambiguity? Was the Marshall Plan simply an expression of U.S. national interests? Fred Block argues that U.S. policy makers exercised hegemonic control over the Y[arshall Plan, which was designed to meet a range of immediate and long-term American goals: it would finance the American export

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THE LIMJTS OF TRAf\"SP:\RE]\;CY

surplus, keeping the domestic economy going; reduce the power of the European Left; enable Europe to afford multilateralism; and give the United States the leverage necessary to restructure European economics to ensure that they remained a market for American exportsY Michael Hogan also focuses on the U.S. role, but suggests that American policy makers were motivated by a somewhat different set of concerns. Hogan argues that the Marshall Plan was the product of an American New Deal coalition that sought to re-create their brand of American neocapitalism in Europe. 4R There is no question that U.S. policy makers gained unprecedented influence over the shape of European economic development through their administration of the Marshall Plan. Ascribing that influence to a single coherent logic-be it multilateralist or New Deal-inspired-is more difficult. As Helleiner has pointed out, there existed considerable internal differences of opinion within the U.S. government. Moreover, the ECA's most concrete source of influence-the counterpart funds-was limited to the right of refusal; it could not propose how the funds should be used. 49 From the moment of the initial, open-ended proposal by the secretary of state, the Marshall Plan was marked by its Ametican origins but shaped by its collaboration with the Europeans it was to assist. Its success cannot therefore be explained purely by the force of American hegemony. Perhaps, then, we must look to the kind of policies implemented through the Marshall Plan to understand its effects. Charles Kindleberger has suggested that Europe faced two alternative approaches to the task of domestic recovery: "planning, priorities, rationing, price control, labor allocation, export set-asides, import quotas, etc., on the one hand, and budget balancing, credit restriction, and high interest rates, on the other." The debate over the path to external balance also fell into similar camps, with those advocating import and export controls on one side and those recommending depreciation on the otheL" 0 The approach that was ultimately followed-neoclassical or Keynesian-depended on the political philosophy and capacity of individual states. To what extent did the Marshall Plan work to foster either of these approaches? If the Marshall Plan was written in a hybrid language and inflected with an American accent, what was the grammar of its economics? v\'ere its sentences structured by the logic of planning and control or by that of fiscal conservatism and credit restriction? The plan certainly contained elements of neoclassical economic orthodoxy. The key to convertibility, it was argued, was domestic price stability. Plan administrators had hoped that the system of counterpart funds could be used to reduce inflationary pressures in European economies. On the other hand, ECA administrators also sought to dramatically increase domestic investment to expand production, a goal that would be thwarted by

THE EARLY BRETTOI\ WOODS YE\RS,

1944--1958

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deflation. European governments sought to walk a careful line between these two goals by emphasizing state-managed investment strategies: "The idea," Block writes, "was that, if each investment dollar was used in the most efficient way possible, an optimal trade-off between investment and inflation could be attained." 51 Although that trade-off did not involve extensive coercion of capitalist firms, it did include a wide number of the strategies that Kindleberger includes under his first list of planning-oriented strategies.'' 2 On balance, although its anti-inflationary strategies were neoclassically orthodox in spirit, the Marshall Plan's overall method was more in keeping with the mixed approach that characterized Keynes's own recommendations: state-led investment was the tool used to foster a full-employment market-based economy. The Marshall Plan was severely criticized by neoclassical economists and politicians as unnecessary and inflationary. Senator Joseph Ball opposed the Marshall Plan on the grounds that the solution to Europe's problems lay in the far simpler expedients of balancing national budgets and depreciating exchange rates to the purchasingpower parity level. Gottfried Haberlcr, along with a number of other economists, similarly argued for halting inflation and adjusting the exchange rate. 53 The Marshall Plan's administrators sought a f~u- more interventionist solution to the challenges ofliquidity and adjustment. The Marshall Plan was not only Keynesian in its economic content but also in its strategies for managing ambiguity. The Marshall Plan was a massive, ambitious, and complex program. And much like that other ambitious agreement signed at Bretton Woods in 1944, the Marshall Plan also contained its share of internal tensions and ambiguities. The plan was initiated by the United States but negotiated with and implemented by sixteen European economies. The plan was designed to coordinate European economic activity while allowing for domestic autonomy-to balance the international and the domestic much like the Bretton Woods plan. The plan was explicitly political in some respects: it was de;-eloped to accommodate moderate unions and parties while excluding Communist-backed organizations. At the same time, it was fundamentally apolitical in other ways, much like Keynes's own approach. Charles Maier has suggested that the plan, like the postwar settlement as a whole, was based on the assumption that "issues of political power could be transformed into questions of efficiency and technique." 54 This faith in the existence of a single expert solution was combined with an institutional structure that left much to chance, negotiation, and national tradition. There were no tidy formulae to determine how this badly needed aid was to be distributed, or how it should be used. Kindleberger suggests that the yery absence of a set of o~jective criteria forced the European states into a process of political negotiation and cooperation with

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THE LIMITS OF TR.-\1'\SP.-\REI"CY

one another that they would not have otherwise undertaken, and thus helped to foster a new conception of political sovereignty: "The division of aid without objective economic or political criteria was a creative cooperative act, forced upon Europe by the United States, no doubt, but none the less cooperative." 55 The Marshall Plan thus articulated a Keynesian approach to ambiguity-one that recognized its necessary place in the economic order and sought to accommodate and manage rather than to eliminate it.

The European Payments Union, r950-r958 Although the Marshall Plan assistance was generous, it would not last long enough to sustain a full European recovery. Unless some other solution was developed in time, the dollar shortage and all of its attendant problems would return once again in full force once American aid disappeared. The eventual solution was the European Payments Union, created at a meeting of the OEEC in Paris on July 1, 1950. The EPU was designed not to ii~ect additional external liquidity into the European economy but to ensure that what liquidity already existed was used efficiently. To do so, however, required protecting limited European supplies of dollars. Greater intra-European trade and com·ertibility was thus bought at the price of greater discrimination against the United States and other dollarbased currencies. The purpose of the EPU agreement was to increase the liquidity of the system by making European currencies more readily convertible among European countries. Until this point, most monetary arrangements in Europe were bilateral: two countries agreed to exchange their currency for a fixed rate up to an agreed limit, called the "swing." Beyond that limit, any deficits in trade had to be settled in gold or a convertible currency. 56 Such agreements did inject additional liquidity into the system, adding a measure of flexibility into a system of trade that would othenvise have been severely hindered by the strict use of gold or convertible currencyP These arrangements were limited by their bilateral nature, however. France might exhaust its swing with Britain while carrying a surplus with Germany. As long as these agreements remained bilateral, there was no way for the credits France obtained from Germany to be paid to Britain; France would therefore be forced to use its limited reserves of gold or dollars to settle with Britain. Over time, to minimize its loss of reserves, France would likely seek to reduce its imports from Britain in favor of those countries to which it was a creditor. Complex patterns of discrimination and favor thus grew and spread in the context of this bilateral payments system. The European Payments Union was designed to work in much the same way as Keynes's original plan for an International Clearing Union,

THE 1:>\RLY llRETTO:\ WOODS YEARS,

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The IMFs Move from Constructive Ambiguity to Increasing Rigidity The early Bretton Woods regime's successes were facilitated by the rise of a Keynesian approach to managing ambiguity, but the rigidity of the neoclassical strategies left its mark on the evolving financial system. vVe can see both of these forces at work in the fledgling International Monetary Fund, an organization that played a small role in the early days of the regime, but that was ultimately to play a far more central part in the financial system. Like the Bretton v\'oods agreement, the IMF's terms of operation were a study in ambiguity. Moreover, board members appeared to be self-reflexively aware of their own powers of interpretation: in an early memorandum to the executive board, the managing director drew attention to the "compromises and ambiguities which were to be found in the Articles of Agreement, as a necessary consequence of the diverse views held by those who had framed the Articles." 71 Rather than delegating the task of interpretation to a committee designed for such a purpose, which would presumably focus on legal issues, he urged the board to take on this role, guided primarily by policy concerns. The Fund's board members thus faced a complicated task in these early years as they sought to interpret their own articles of agreement. From the very beginning, there were conflicts between those who sought to forge narrow interpretations that would effectively eliminate such ambiguities and those who sought to retain a greater degree of ambiguity in order to respond to changing cases and circumstances. The Fund's first major goal was to begin the gradual process of establishing a stable international monetary system. Triffin notes that when the 1~1F declared the initial par values in 1946, it was clear that they were provisional: "vVhatever par values were set, they would have to be modified considerably, and unpredictably, to fit an extremely fluid and fast-changing environment."72 Yet the agreement contained an important tension by urging stability in exchange rates and providing for a measure of flexibility. 73 The ultimate balance between these two tendencies would have to be worked out in practice, in response to a changing global environment. In its first years of operation, the board began negotiating with member states to move them toward a fixed exchange rate regime. Board members were particularly concerned about the practice of adopting multiple exchange rates, in which a state introduced several different, non-par exchange rates for a single currency. Over time, such practices evolved into a veritable multiplicity of rates, as described by the Bank for International Settlements in 1949: A whole new vocabulary has been formed, rates being variously described as official, free, black-market, parallel, or grey, or classified as

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THL LI1\.HTS OF TR:\1'\SP:\REi\"CY

security rates, compensation rates, etc. There are rigidly fixed ratesin or out of touch with reality-fluctuating rates, orderly or disorderly cross rates, multiple rates, tourist rates, etc. 74 In 1946, thirteen countries, all but one of them Latin American, had multiple exchange rates?' The board spent the better part of that year studying the matter and published a letter that recommended eliminating multiple currency practices as rapidly as possible. It was quickly discovered that this narrow interpretation of the Fund's mandate was difficult to uphold in practice. Member states argued that multiple currency practices were often necessary and could play a positive role in some instances. In an early statement to the board, the managing director noted that exchange requests that did not conform to the stated principles of the Fund would be treated with a "practical approach," not a "standardized mold," as the board sought to look at the problem "from the member's point ofview." 76 The board applied this open interpretive strategy in responding to member states' requests to retain or introduce multiple exchange rate practices. In fact, by 1955, thirty-six of the Fund's fifty-eight members used some sort of multiple currency system. 77 By accepting multiple exchange rates through a liberal interpretation of its own terms, the Fund introduced greater flexibility into its rules and thus provided a temporary outlet for the volatility of postwar finance. 78 Rather than adopting a hard-line neoclassical approach to exchange rate regulation, the Fund took a more accommodating route to liberalization. By introducing greater negotiability into establishing and managing exchange rates, the Fund allowed states to adopt a whole range of policies that would allow them greater domestic autonomy in recoyering from the war, or, in the case of developing nations, in beginning the difficult task of development. 79 Over time, as the Marshall Plan and EPU helped Europe to recover its balance of payments position, many multiple currency practices became unnecessary and were eliminated. By adopting a more open approach to the interpretation of its rules-by effectively accepting and even integrating an ongoing measure of ambiguity-the Fund achieYed its goals of international monetary cooperation and stability. 80 This institutional flexibility began to erode, howeve1~ as early as 1949. The same debates that raged within the international community consumed those working within the IMF, and orthodox neoclassical policies had their day there as well. Neoclassical influence was nowhere more evident than in the Fund's central role in the push for devaluation in 1949. This time, the Fund dropped its case-by-case strategy and opted for a onesize-fits-all approach to exchange rate regimes. The Fund's rigid demands were answered with disdain by Britain, which refused to consult with the Fund when it finally decided to devalue sterling. The cost of this narrow

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market-driven approach was the loss of the Fund's legitimacy in the short run, and the loss of the monetary system's flexibility in the long run: The crisis associated with the 1949 sterling devaluation in turn created further resistance by monetary authorities to changes in parity, which ultimately changed the nature of the international monetary system from the adjustable peg intended by the Articles to a fixed rate regime. Hl Some analysts believe this tendency toward rigidity was built into the adjustable peg system. In Milton Friedman's famous 1953 article advocating floating exchange rates, he argued that an adjustable peg arrangement is the worst possible system. By limiting exchange rate changes to rare occasions of fundamental disequilibrium, he argued, such a system encourages states to leave parity changes to the last possible moment-when speculators are certain that the shift will occur, enabling them to make a one-way bet on the currency. 82 Bordo argues that the devaluations of 1949 revealed this underlying weakness in the exchange rate system. 83 A closer examination of the events of 1947 and 1949, however, suggests a different interpretation: the increasing rigidity of the exchange rate system was not an inevitable response to the system's underlying weaknesses but a specific reaction to a set of political-economic events. The speculative attacks on the pound in 194 7 and 1949 were sparked bv a series of neoclassical economic policies. These policies granted more influence to capital markets at the same time as they fostered a new set of expectations regarding exchange rate devaluations. There was nothing inevitable about the way in which the phrase "fundamental disequilibrium" was interpreted; after all, it was purposely left ambiguous. Instead, the phrase gained a particular connotation as an extreme and rare occurrence in the context of the events of the late 1940s. The unwritten niles of the Bretton V\'oods regime thus emerged as part of an ongoing social process of political and economic interaction.H 1 The crisis that the United States and the IMF helped facilitate, and which they did little to resolve, ultimately convinced states that their best policy was maintaining a close-to-fixed exchange rate, greatly increasing the rigidity of the monetary system.H 5 By focusing on the ways in which various policies were used to manage ambiguity, we can make sense of both the successes and the failures of the early Bretton Woods regime. Such a perspective moves beyond the limitations of institutionalist economic approaches, revealing that the success of these early policies rested not simply on their ability to reduce uncertainty but also on their agility in exploiting their own internal ambiguities. A focus on ambiguity also complicates power-based analyses by pointing to the limits on U.S. hegemony created by the heterogeneous and contested

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THE LIMITS OF TRAI>OSPAIian economies, with their more state-led approach to economic governance, do not represent a different model for economic development-but a less mature one. In the end, there is only one true path-that of financial liberalization.

Negotiabilit)' Although there is evidence of limited improvements in institutional flexibility and self-reflexivity by the Fund, it is making no attempt to increase the negotiability of financial governance. Instead, IMF leaders seem intent on denying the political implications of their proposals for financial reform. Despite the political overtones of their new rhetoric, Fund leaders use the language of "civilization" and "citizenship" to portray the world in profoundly apolitical terms: as a world bound by a single set of universal economic values-uniform, undifferentiated, and without fundamental conflict. In doing so, they conceal the political implications of imposing a particular, \\'estern set of economic practices around the world. 51 In this

AMBIGUITY Al\ll THE I'UTURI: " " , INANciAL covERI'\ANCE

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context, the emphasis on adapting IMF policies to individual states' circumstances becomes little more than an effort to sugarcoat the attempt to make those states adapt to the dictates of a liberalized global ec