In anything like its original form and intent, the monetary system envisaged at Bretton Woods did not survive. What was hoped would be a stable relationship between currencies gave way to the reality of increasingly diverse internal economic policies or nonpolicies, some of them reflecting the freedom from fiscal orthodoxy that was allowed by Keynes and his general case that internal economic well-being and employment should not be sacrificed to external exchange stability. The conflict between the two is still not fully accepted, certainly not by those who talk glibly about creating a new international monetary system: stable or predictable exchange rates will never be possible so long as individual countries have different rates of inflation (or, more improbably, deflation) based on different monetary, fiscal, and wage/price policies. This is in some degree recognized with respect to the poor countries of the world; they get instructions, however damaging the implementation, from the IMF on what their fiscal and monetary policies should be. Without compatible internal policies and resulting price behavior, a stable or even a predictable exchange relationship is a mirage. The surprising thing is how well international trade survives instability — it would be surprising to Keynes. [my emphasis]This dynamic he described there is relevant to the current situation of the eurozone. Galbraith recognized and shared the priority that Keynes placed on the policy approach "that internal economic well-being and employment should not be sacrificed to external exchange stability." But that's exactly what the eurozone does, just as the gold standard once did, and what Galbraith is suggesting there would have happened if the Bretton Woods approach had been applied with the dogmatic fervor that Angela Merkel today is applying her favorite economic nostrums ("ordoliberalism") on the eurozone.
So with the euro, Cyprus, Greece, Ireland, Italy, Portugal and Spain all have a stable currency. Whether they want it or not. If they had separate currencies, currency devaluation could contribute enormously to economic recovery by stimulating the kind of export business Merkel supposedly. But since they are tied to the euro, the only way that can achieve that goal is by internal devaluation, i.e., drastic reductions of income, living standards and social security for the majority in those countries. Which translates into years more, possibly decades more, of depression-level conditions.
This is what Paul Krugman alludes to in The State of the Euro, In One Graph 01/04/2014:
So is the euro crisis over? No — it’s not over until the debt dynamics sing, or perhaps until the debt dynamics sing a duet with internal devaluation. We have yet to see any of the crisis countries reach a point where falling relative wages are generating a clear export-led recovery, or in which austerity is actually paying off in falling debt burdens.I'm reading this in the context of Krugman's other writing over the last few years on the euro. And it sounds to me like he's offering cold comfort here. I know from his concern over the authoritarian turn in Hungary - which may ultimately be a more consequential EU failure than the Eurozone Depression - that he's very concerned about any turn toward authoritarian governments and away from democracy in Europe.
But as a europessimist, I do have to admit that it's now possible to see how this could work. The cost — economic, human, and political — will be huge. And the whole thing could still break down. But the ECB's willingness to step up and do its job has given Europe some breathing room. [my emphasis]
And that's the only way that I can see Merkel's austerity gospel working for the eurozone: democracy will have to be seriously abridged to get all those countries to continually agree to prolonged economic depression. Merkel via the Troika of the EU Commission, the ECB and the IMF has already imposed for short periods what were effectively caretaker governments in Greece (2011-12) and Italy (2011-13). It's hard to see how democracy and Angela Merkel's Herbert Hoover/Heinrich Brüning economic policies in the eurozone periphery can long co-exist.
Galbraith also gave helpful evaluations of the impact of Keynes' two most important works, The Economic Consequences of the Peace (1919) and The General Theory of Employment Interest and Money (1936).
His description of Economic Consequences reminds us of how complex and contradictory the influence of such a work can be:
The first chronologically was his powerful tract against the reparations clauses of the Versailles Treaty, The Economic Consequences of the Peace. Its argument that Germany could not, within the frame of the then-existing international monetary and exchange relationships, meet the claims made upon it is at least debatable. Etienne Mantoux, the son of Paul Mantoux, the great French economic historian, published a persuasive case against Keynes in 1944, a few months before his own death in World War II. If Germany had lowered its living standards - by what is now so casually and amiably called, by the financial establishment, a resort to "austerity" - the requisite trade balance might have been developed. The decisive question then, as in the debtor countries now, was whether the political structure of the new republic could take the strain. (It was also necessary then, as now, that other countries take the goods.)This fits nicely with Krugman's comment quoted above. Galbraith was referring there to countries in the developing world with debt problems. But his comment is awfully reminiscent of the current eurozone situation. The "financial establishment" is insisting on "austerity," which since 2007 no longer has quite as amiable a sound as it did in 1984, is insisting on the periphery countries lowering their standards of living, and drastically. "The decisive question then, as in the debtor countries now, was whether the political structure of the new republic could take the strain." Older republics than Weimar are feeling the strain currently.
What is less in doubt is the effect of Keynes's book on public and political attitudes emerging from the war and the peace. Germany, partly and perhaps primarily as a consequence of Keynes's book, ceased to be regarded as the offender in the 1914–1918 conflict and became the unfairly abused victim. In contrast, after 1945, Germany, not least among the Germans themselves, was held responsible for the devastation and death.
A further consequence of Keynes's book was that reparations after World War II were taken not in monetary claims but in kind. Perhaps — it was certainly my view at the time — this was worse. One had to know the reaction of the workers of a German industrial town to the removal of the industrial equipment that accorded them their livelihood to see how depressingly cruel this escape from Keynes could be. [my emphasis]
Of The General Theory of Employment Interest and Money, Galbraith writes:
Unlike nearly all of Keynes's other writing, this volume is deeply obscure; perhaps had it been otherwise and had economists not been called upon to debate his meaning and intentions, it would not have been so influential. Economists respond well to obscurity and associated puzzlement. But the essential point in The General Theory, though intricately disguised, is wholly clear: the modern economy does not, as the then-accepted theology held, tend automatically to optimal performance.And this is the lesson that the Very Serious People in Europe and the US have unlearned, and still show the greatest reluctance to acknowledge: "Not some recurrent and self-correcting aberration of the business cycle was here involved; in the absence of corrective action by the state, grave unemployment would be the norm."
This, coming as it did after six years of depression and an even longer period of economic desuetude in Britain, cannot now seem an altogether astonishing point. Nonetheless, it broke in on the established structure of economic thought, as it was termed, with a glass-shattering effect. Not some recurrent and self-correcting aberration of the business cycle was here involved; in the absence of corrective action by the state, grave unemployment would be the norm. Production did not create its own sufficient demand; holding on to money—liquidity preference—could intervene to reduce demand. Then output would spiral down until privation forced a spending of revenue that was in balance with the supply of goods. Here equilibrium — the underemployment equilibrium — was reestablished. There was much more than this, but this is the hard core. [my emphasis]
Tags: angela merkel, austerity economics, eu, euro, european union, john kenneth galbraith, keynes