Global imbalances, monetary disorder, and shrinking policy space: Keynes's legacy for our troubled world

Carabelli, Anna M.; Cedrini, Mario A. Article Global imbalances, monetary disorder, and shrinking policy space: Keynes's legacy for our troubled world Intervention. European Journal of Economics and Economic Policies Provided in Cooperation with: Edward Elgar Publishing Suggested Citation: Carabelli, Anna M.; Cedrini, Mario A. (2010) : Global imbalances, monetary disorder, and shrinking policy space: Keynes's legacy for our troubled world, Intervention. European Journal of Economics and Economic Policies, ISSN 2195-3376, Metropolis-Verlag, Marburg, Vol. 07, Iss. 2, pp. 303-323, https://doi.org/10.4337/ejeep.2010.02.10 This Version is available at: https://hdl.handle.net/10419/277194 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Global imbalances, monetary disorder, and shrinking policy space: Keynes’s legacy for our troubled world Anna M. Carabelli* and Mario A. Cedrini* Th e paper aims at showing that revisiting Keynes’s early writings on international economic relations and some less well-known episodes of his economic diplomacy, with special attention being paid to the methodological issues involved, may disclose useful insights in understanding the features of his desired new global order. We contrast the three main pillars of Keynes’s vision as detected in this revisitation (coordinated multilateral responses to global imbalances, a rational international monetary regime, and enhanced policy space) with the major shortcomings of the current non-system, and show the continuing relevance not only of Keynes’s specifi c proposals for global reform, but also, and most importantly, the legacy of his way of reasoning about international economic relations. JEL classifi cations: B31, F02, B41 Keywords: John Maynard Keynes, international economic order, Bretton Woods II * Università del Piemonte Orientale, Italy. Correspondence Address: Mario A. Cedrini, Università del Piemonte Orientale »Amedeo Avogadro« – Alessandria, Novara, Vercelli, Department of Economics and Quantitative Methods (SEMeQ), Via Perrone 18, 28100 Novara, Italy, e-mail: [email protected]. Received 16 January 2010, accepted 06 May 2010 © INTERVENTION 7 (2), 2010, 303 – 323 304 Intervention. European Journal of Economics and Economic Policies 1. Introduction Keynes is back. Th e fi nancial crisis has succeeded in promoting both a return to Keynesian national policies and, even more interestingly, a rediscovery of Keynes’s international economics. It is not diffi cult to detect evidence of the continued relevance of his reform plans for Bretton Woods in the bulk of proposals for international monetary reform that have been recently suggested as a way out of the crisis. Expert committees of international institutions are debating with unusual passion on the two main pillars of Keynes’s project for an International Clearing Union (ICU), i.e. the need of shifting part of the responsibility for international imbalances to creditor countries, and the establishment of a true supranational currency (see UNPGA 2009 and the surprising emphasis put by Zhou Xiaochuan (2009: 2), the Governor of the People’s Bank of China, on the desirability of a new »international currency unit, based on the Keynesian proposal«). However, Keynes’s legacy for our world is not limited to a series of specifi c recommendations on how to reform the international architecture. Among the themes to be rediscovered in Keynes’s work, Kirshner (2009: 527) correctly places »the potentially fragile underpinnings of international economic order« and the »inherent dysfunctions of the international monetary economy«, and insists on the relevance of »Keynes’s philosophy and its relationship to economic inquiry«. Likewise, Vines (2003: 358) argues that the rediscovery of Keynes should be accompanied by a revisitation of the »focus and method« of his work, which shows his »extraordinarily clear understanding of how pieces of the global economy interact, driven by the policies of autonomous nations, in an only partly coherent manner« (339). In line with these suggestions, this paper aims at showing that revisiting Keynes’s early writings on international economic relations (Th e Economic Consequences of the Peace, Indian Currency and Finance) and some less well-known episodes of his economic diplomacy (his proposal of an American gift to Britain at the end of World War II), with special attention being paid to the methodological issues involved, may disclose useful insights in understanding the wisdom of Keynes’s Bretton Woods plans for international reform. In so doing, we contrast the three main pillars of Keynes’s vision of international economic relations as detected in this revisitation, namely, coordinated multilateral responses to global imbalances, a rational international monetary regime, and enhanced policy space, with the major shortcomings of the current non-system, and show not only the continuing relevance of Keynes’s specifi c proposals for global reform, but also, and foremost, the legacy of his general vision and way of reasoning about international economic relations for our troubled world. 2. Keynes and the complexity of international economic relations: Th e Economic Consequences of the Peace Keynes considered economics to be »a branch of logic, a way of thinking […] in terms of models joined to the art of choosing models which are relevant to the contemporary world« (Th e Collected Writings of John Maynard Keynes – hereafter: CW 14: 296 – 97). Remarkably, Carabelli/Cedrini: Keynes’s legacy for our troubled world 305 he believed it to be in the »nature of economic thinking« to cope with the complexity of the economy without abstracting from variability, as he wrote in the General Th eory, »after we have reached a provisional conclusion by isolating the complicating factors one by one, we then have to go back on ourselves and allow, as well as we can, for the probable interactions of the factors among themselves« (CW 7: 297). Th e notion of »complexity and interdependence«, which characterizes his methodological approach to probability (see Carabelli 1988), recurs frequently in Keynes’s mature economic writings (e.g. CW 1: 182; CW 8: 298). For Keynes, the need to work with complex magnitudes – such as purchasing power, real income, and the general price level, that are »capable of variations of degree in more than one mutually incommensurable direction at the same time« (CW 5: 88) and, due to their heterogeneity, raise problems of measurement and comparison – combines with the organic interdependence that binds them one to another, so that »the atomic hypothesis which had worked so splendidly in physics breaks down in psychics. We are faced at every turn with the problem of organic unity, of discreteness, of discontinuity – the whole is not equal to the sum of the parts, comparison of quantity fails us, small changes produce large eff ects, the assumptions of a uniform and homogeneous continuum are not satisfi ed« (CW 10: 262). Th e atomic hypothesis breaks down also at the social level: complexity and interdependence lie at the basis of the dilemmas, paradoxes, and confl icts between individual and social interests that Keynes’s macroeconomics is intended to counteract (Carabelli/De Vecchi 2001). Likewise, a distinctive trait of Keynes’s vision of international economic relations as a complex object is the use of a peculiar method of investigation that enables him to tackle organic interdependence among the variables of a system characterized by openness, incompleteness, indivisibility, contingency and chance. Th e most vivid illustration of Keynes’s refusal to apply the »atomic hypothesis« in international economics is off ered by Th e Economic Consequences of the Peace (ECP; see Carabelli/Cedrini forthcoming). Keynes was persuaded that the Treaty of Versailles »ignores the economic solidarity of Europe, and by aiming at the distruction of the economic life of Germany it threatens the health and prosperity of the Allies themselves« (CW 17: 58). Th e »economic unity of Europe« rested in fact, he wrote, on the economic and territorial integrity of Germany, the heart of the European »body« (CW 2: 2), and »on the prosperity and enterprise of Germany the prosperity of the rest of the Continent mainly depended« (9). In his vision, the highly punitive dispositions of the Treaty on German coal and iron were leading European policymakers into a »real dilemma« (58). France and Italy’s attempt to save their industry by securing reparations in kind from Germany possessed »unanswerable force from a certain point of view« (ib.); yet, in case of surrender of German coal, Northern Europe and Austria-Hungary would have been compelled to recur to »international barter« (59) with Germany, which France and Italy could not tolerate unless the treaty’s obligations were met fi rst: 306 Intervention. European Journal of Economics and Economic Policies »In this there will be a great show of justice, and it will be diffi cult to weigh against such claims the possible facts that, while German miners will work for butter, there is no available means of compelling them to get coal, the sale of which will bring in nothing, and that if Germany has no coal to send to her neighbours she may fail to secure imports essential to her economic existence« (60). Keynes described the European situation as an »impending catastrophe« with »all the elements of ancient tragedy« (3). A moral confl ict for the European body charged with the settlement of the continent, the coal settlement assumed the forms of a rational dilemma for France and Italy: »If the European Civil War is to end with France and Italy abusing their momentary victorious power to destroy Germany and Austria-Hungary now prostrate, they invite their own destruction also, being so deeply and inextricably intertwined with their victims by hidden psychic and economic bonds« (2). »Men have devised ways to impoverish themselves and one another and prefer collective animosities to individual happiness« (62), Keynes observed on discussing the struggle between, on the one side, nationalism and »private interest« and, on the other, »sentiment and historic justice« (60) and the future prosperity of the continent. In »so complex a phenomenon« (160), the only way out of the impasse (»a case where particular interests and particular claims, however well founded in sentiment or in justice, must yield to sovereign expediency«, ib.) lay in the cancellation of inter-allied debts, allowing the European claimants to recede from asking impossible reparations of Germany. As Keynes was to explain in Th e End of Laissez-faire, the cure for the fallacy of composition between particular and general interests, which is typical of worlds characterized by complexity and interdependence, lies »outside the operations of individuals« (CW 9: 291); it has a social character and is provided by public institutions able to »exercise public action grounded upon deliberate and reasonable […] judgement« (Carabelli/De Vecchi 2001: 234). Being aware that, since »interdependence required management«, »a ›leader‹ was a great asset (if not an essential one) in doing this« (Markwell 1995: 209), Keynes was to express his hopes for a renewed leadership of Britain, possessing the »experience or the public spirit« (CW 9: 236) to counteract the »competitive struggle for liquidity« (CW 21: 42) – an »extreme example of the disharmony of general and particular interests« (52) – nurturing the world slump of 1931. Likewise, in 1919, the »appeal to the generosity of the United States« (CW 2: 93) and Britain, which should provide the European creditors with an »alternative mode of escape from their troubles« (94), was an »absolutely essential« (171) precondition to face the reparations problem. As an »act of farseeing statesmanship« (93) on the part of the two powers, combining »expediency and generosity« (179), debt forgiveness should have promoted, but at the same time required as its precondition, an »honorable attempt« on the part of the European countries »not to continue war, economic or otherwise, but to achieve the economic reconstitution of the whole Continent« (173). As Keynes pointed out, Carabelli/Cedrini: Keynes’s legacy for our troubled world 307 »the fi nancial problems which were about to exercise Europe could not be solved by greed. Th e possibility of their cure lay in magnanimity. Europe, if she is to survive her troubles, will need so much magnanimity from America, that she must herself practice it«. (92) After the United States’s refusal to renounce its share of inter-allied debts, Keynes presented the proposal of an international loan asking winners, losers and even neutral countries to take part in the »grand scheme for the rehabilitation of Europe« (CW 16: 428). Yet, in the ECP, the proposal lies in continuity with, and logically follows, the plan to eliminate Inter-Allied indebtedness. Th e European confl ict could not be settled unless the ignition key provided by the American assistance to the continent – a gift element acting as a strange attractor (Godbout 1998) – allowed a spiral movement of »magnanimity« to spread along, and progressively expand, the chain of countries disposed to take part in Keynes’s sharedresponsibilities scheme. 3. Keynes’s desired new order and the proposal of an American gift Th e main aim of Keynes’s work as an international economist and negotiator was to revamp the »lost paradise« (Dimand 2006: 175) of the pre-1914 internationalization he had described in the opening pages of the ECP, a task made diffi cult by what he came to defi ne, in the Treatise on Money, as the »dilemma of the international system«, that is the double need – already dealt with in A Tract on Monetary Reform – »to preserve the advantages of the stability of the local currencies of the various members of the system in terms of the international standard, and to preserve at the same time an adequate local autonomy for each member over its domestic rate of interest and its volume of foreign lending« (CW 6: 272). For the fi rst time in recent history, Keynes noted, Britain was not able to infl uence world credit conditions any longer, and found herself exposed to the constraints of the dilemma. Keynes’s proposal for a new international leadership of Britain in 1931 was a direct attack on the »anti-social« (CW 21: 53) behaviour of America and France, who »have not lent their surplus balance on international account as Great Britain used to do in the past« (CW 20: 600). On proposing the plan for an International Clearing Union (ICU) in the Forties, he was to recall that Britain had provided the pre-war international system with a leadership able and willing to limit the strict discipline of the classical mechanism, by sharing the adjustment burden with debtor nations. By investing long term in the new countries – the process, Keynes argued in his 1929 lectures, »by which rich countries spread the proceeds of their wealth over the world« (Fleming, 2000: 142) –, Britain had granted them the possibility to live and develop in a multilateral system. While progressively elaborating a view of economic history as a permanent confl ict between creditors and debtors (De Cecco 2001), Keynes came to assign himself the task of sketching a model of national behaviour consist- 308 Intervention. European Journal of Economics and Economic Policies ent with the general interests of the system (Moggridge 1986), and found it in the »twice blessed« (CW 7: 349) policies of regaining control over the interest rate, whereby countries could reach and maintain full employment and help their neighbours, at the same time, to achieve this same result. Keynes’s projects for global cooperation in the Forties refl ected his desire »to achieve by multilateral cooperation what British leadership of the international economy had once done« (Markwell 2006: 261). Th e interwar period had instructed him about the risks a system has to tolerate when it depends so critically on the willingness of its most powerful members to respect the rules of the game. Th e ICU plan was more than a contingent solution to »the outstanding economic problem of the post-war world […] [i.e.] how the U.S.A. is to redress her unbalanced creditor position« (CW 27: 19); more ambitiously, it should have laid the foundations of »a sounder political economy between all nations« (CW 25: 43), by establishing »a system of general and collective responsibility, applying to all countries alike, that a country fi nding itself in a creditor position against the rest of the world as a whole should enter into an obligation to dispose of this credit balance and not to allow it meanwhile to exercise a contractionist pressure against the world economy and, by repercussion, against the economy of the creditor country itself« (47). Th e plan directly asked creditor countries to make available the resources they chose to leave idle or accumulated due to a lack of investment opportunities at home. But it was not its intention to favour an »automatic surrender of surpluses« (in Skidelsky 2000: 213); rather, Keynes’s scheme aimed at building a postwar system »where bilateralism would be unnecessary and multilateralism would again be practicable« (Williamson 1981: 542). In this sense, as Moggridge (1992) notes, Keynes was truly making a case for the disarmament in international economic relations. Th is helps explain how the ICU, a »refi nement and improvement of the Schachtian device« (CW 25: 24) – the system of bilateral clearing agreements established by Germany in wartime with European and Latin American countries to conduct trade as an international barter centered on Berlin – came to represent the ideal alternative to Schachtianism itself. Unlike laissez-faire and not dissimilarly from Schachtianism, the »banking principle« (277) of the ICU would have reduced, the economic problem of international adjustment. Yet, by placing emphasis on the virtues of economic interdependence, its »system of general and collective responsibility« could aff ord the task without locking each country in »a position of particular obligation towards others« (46). »Everything else in the plan«, wrote Keynes, »is ancillary« to multilateralism (270). Th ough starting from a national perspective (Newton 2000), thereafter, Keynes came to develop »a theory of how the system as a whole would behave« (Vines 2003: 349). Fear either of a global restraint after the war, or lest the United States could make use of means other than increased domestic demand to sustain full employment, led Keynes to grant the ICU the possibility to create reserves as required by the needs of international trade (Turnell 2002) in a context of fi xed but adjustable exchanges and capital controls, with national monetary policies to aim at internal equilibrium (see Vines 2003). Once reconsidered to the light of the dilemmas of the international system Keynes had exposed in the Treatise, the ICU plan appears as a device to transform international discipline into the choice of freedom of the General Th eory. Carabelli/Cedrini: Keynes’s legacy for our troubled world 309 Keynes’s plans were fi nally rejected at Bretton Woods by the United States, who strongly limited the resources available to the newborn international institutions to cope with the transition to the new order. A fi nancially exhausted Britain had held the European fort alone during the fi rst years of the war and incurred enormous debts with the sterling area countries to fi nance the common eff ort. Scarcity of reserves and expected peacetime diffi culties in exporting goods and services were serious threats to the chances of balancing Britain’s external account in the transition period while returning to sterling convertibility. Th e prospected expiration of the Lend Lease Agreement with the United States led Keynes to design, in his memorandum »Overseas Financial Policy in Stage III« of March 1945, a »bold scheme for an international policy of multilateralism in trade and payments that would simultaneously make sterling’s problems more manageable and justify Britain in seeking and America in giving fi nancial assistance« (Pressnell 1986: 237). Keynes explained the rationale of the plan in the press conference at the beginning of the Washington negotiations. Global interdependence (»the fi nancial and commercial arrangements of a considerable section of the world have become almost inextricably intertwined with our own fi nancial and economic aff airs in London«) was the key to understand why a resolution of Britain’s imbalances could serve the cause of the newborn multilateralism: »We have to look at the fi nancial and commercial problem of the world as a whole; and, moreover, build up a currency and commercial structure which is in the best interest not only of world prosperity […] but of peace and goodwill amongst men […] so as to avoid the violent disturbance of international commerce which are the road to discontents which can shake the social order and to maintain full employment and good wages everywhere by means that do not beggar but, on the contrary, enrich our neighbours« (CW 24: 465). In the memorandum, Keynes pictured three diff erent scenarios for Britain. A lack of American assistance would have compelled her to a »Starvation Corner« unilateral policy of austerity and isolationism at a moment when, due to the overall defi cit of the sterling area, London had inevitably to resort to foreign borrowing to fi nance her debts. What is more, the Starvation Corner and its Schachtian consequences would have favored »not merely the acceptance but the advocacy […] of a system of international economy after the war of a kind to which all sections of opinion, not only in the United States but also in Canada, are bitterly opposed« (271 – 72). As an alternative to isolationism, Keynes fi rst envisaged American fi nancial assistance in the form of a loan ($5 – 8 billion) on easy terms – »Temptation« –, allowing Britain the breathing space to face the transition to the new order and to approach its debt problems with the sterling area. In exchange for the loan, causing »the sweet breath of Justice between partners« in the war to be »sacrifi ced to some false analogy of ›business‹« (279), London would have guaranteed free multilateral clearing within the area from the outset and the dismantlement of the empire; in short, the acceptance of the »American conception of the international 310 Intervention. European Journal of Economics and Economic Policies economic system«, which Roosevelt had already established as the price of the Lend-Lease agreement. Keynes’s own favorite option, »Justice«, required »a general re-consideration of the proper burden of the costs of the war« to allow Britain to be the Americans’ partner »in setting up a post-war international economy of the character on which they have set their hearts« (280). Th e United States should have granted Britain $3 billion as a sort of retrospective Lend-Lease agreement and a $5 billion credit line at easy conditions. In exchange, London would have ensured the de facto convertibility of sterling, after approaching her sterling area creditors with a tripartite program of eliminating (£880 million), funding (£1.5 billion), and freeing (£750 million) the £3 billion balances. Here lies, according to Skidelsky, the main mistake made by Keynes in »fi ghting for Britain«: he wrongly »persuaded himself, against all the evidence, that he could obtain a large gift from the United States to cover Britain’s temporary post-war balance of payments defi cit, without any unacceptable strings« (Skidelsky 2000: xvi). Th at Keynes’s proposal for the »American gift« has gained little attention by the economic literature is scarcely surprising: the fi nal agreement with the Americans was on a $3.75 billion loan on easy terms. Historians tend however to argue that Keynes’s proposal was but a strategic camoufl age of the expected loan, or »an attractive marker, to compare the most favourable possible outcome with the least favourable« (Pressnell 1986: 265). To throw light on Keynes’s proposal as distinct from what has been fi nally agreed on by the British negotiation team, one has to go back the correspondence, in Spring 1945, between Keynes and the treasury representative in Washington, Robert H. Brand (see Cedrini 2010). Commenting on Keynes’s memorandum, Brand wrote that Britain should refrain from claiming, on the basis of American late entry into the war, that »what we propose is not only Justice to us, but also Justice for them« (CW 24: 307): better, then, to ask for »something that looked a little less like a free gift« (308). Keynes replied by observing that since »[t]he various elements in the policy of trying to march with the US in the post-war economic set-up all hang together«, only a gift, and certainly not the »distasteful« second-best policies imposed by the Temptation option, »would enable us to march with them side by side« (316) towards a new world. He was fi rm on the need to reject »anything in the nature of a specific bargain« (324): justice and generosity could agree together, whereas »too exclusive an appeal to American self-interest will be misjudged« (360). True, since the United States was a »business country«, as he later wrote in a memorandum to Hugh Dalton, »some imitation of a normal banking transaction« was necessary (548): yet Keynes only specifi ed that in exchange for the gift, Britain should be ready to accept »the kind of post-war world« wanted by the Americans, a multilateral world of free trade that, in the absence of a gift, »they would fail to get, here and now« (328). To reassure the United States about the participation of the Sterling Area countries to the reconstruction of Britain, Keynes proposed that »the $3 billion from the US should be matched by cancellations by the sterling creditors of an at least equal amount« (324). Brand was right to observe that the free gift required »an atmosphere totally diff erent from anything like the present one« (332). Still, Keynes explained that the gift would have facilitated the task of prompting the sterling area countries to fall in with the proposal: »If America insists on remaining on a strictly economic basis, that makes it Carabelli/Cedrini: Keynes’s legacy for our troubled world 317 another step forward in the attainment of self-government, in the power to control his fortunes according to his own wishes. We shall then record the subtle, profound, unintended, and often unnoticed infl uences of the precious metals on past historical events as characteristic of an earlier period« (317). In ICF, anticipating his views in the Forties, Keynes off ered the picture of an international monetary system able to conciliate, aptly managed as it was through the use of exchange reserves held in the international fi nancial centres, the interests of debtors with those of creditor nations (the ›reserves are to be used not shown‹ principle informs the ICU plan as well, which is intended to discourage hoarding of surpluses and the defl ationary eff ects these may have on the world economy; the proposal of a new global currency, the bancor, is the conclusion of a path, from commodity to fi at international money, that Keynes started off on writing ICF). Th e parallel between his early look at Asia for hints of monetary reform and current, Asia-driven new features of global interdependence shows our inability to cope with the spectacular eff ects of »a change of ideas in Asia«, that is the passage – forced by the adoption of neo-liberalism and fi nancial liberalisation under Western pressures – from external borrowing to »undervaluation-cum-intervention« as development strategy. Asia has now »turned the tables on the West«, but the West has not yet learnt how to control »the most intimate adjustments« of its »economic organism«. Contrary to Keynes’s desired order, BWII combines expensiveness with instability. Th is is due, on one hand, to the use of a national currency as the global reserve currency and the instrument for international payments, which compels the reserve country to face chronic defi cits (see Greenwald/Stiglitz 2008). While in the golden age of Bretton Woods the ultimate creditor country was willing and able to off er a permanent free lunch for all by accepting the major responsibility for solving international payments imbalances, the mercantilist tendencies of BWII cannot but produce a defl ationary environment (Davidson 2008). On the other hand, the »fallacy of composition eff ects that feed into global imbalances« (Ocampo 2007: 12) have much to do with emerging countries’ demand for protection from pro-cyclical capital infl ows accompanied by limited possibilities to adopt counter-cyclical policies. True, emerging markets have used exchange reserves to protect themselves against banking problems, capital fl ights and associated currency depreciations. Yet, as Aizenman notes, »the reluctance of many countries to draw on their reserve holding raises the possibility that they may now suff er less from the well-known ›fear of fl oating‹ than from a ›fear of losing international reserves‹, which may signal a deterioration in the credit worthiness of a country. Mitigating this concern should be the prime responsibility of the international fi nancial institutions« (Aizenman 2009: 17). In this sense, the early economics of Keynes and his proposal of rational monetary reform lead one to conclude that the unintended evolution which has transformed global imbalances and reserve accumulation into an engine of global growth, under the assumption of ever-growing American demand for foreign goods, does not make them reasonable, nor does it justify inactivity with regard to their persistence. Economic anxieties, more than the aggressive or defensive behaviours they produce in a neo-liberal environment, are likely to 318 Intervention. European Journal of Economics and Economic Policies explain the BWII logic of reserve hoarding. Th e antidote to such anxieties may only come from ›rational‹ reform plans, such as an updated version of Keynes’s ICU scheme, deliberately designed to counteract them. 6. Freedom to choose and policy space With its stress on the universality of ›right‹ paths to economic growth, the Washington Consensus paradigm (see Cedrini 2008) is a perfect symbol for the post-Bretton Woods world’s inability to cope with the ›dilemmas of the international system‹. Th e emerging world has learned the lesson, but the BWII system has de facto reached another impasse. Th e ›embedded liberalism‹ of the Bretton Woods system rested on the ›free lunch for all‹ off ered by America via the Marshall Plan, refl ecting the United States’ decision to accept »the Keynes Plan’s suggestion that it is in the best interest of all nations if the major creditor nation bears the major burden of reducing trade imbalances and international payments adjustments« (Davidson 2007: 145). Davidson’s project of a new international clearing union modelled on Keynes’s plan aims therefore to create a Keynesian global order possessing a built-in expansionary bias, rather than having to rely on the ›happy accident‹ of the leader’s commitment to a public-spirited behaviour. Th e interpretation that is here advanced of the proposal of an American gift to Britain in 1945, stressing the substantial continuity it provides with his Bretton Woods plans for global reform, may off er further elements to grasp the essence of Keynes’s quest for a new global order. Paradoxically enough, given the contrast with the interpretation of the ICU plan as an ›automatic surrender of surpluses‹, Keynes’s proposal of an American gift seems entirely inscribed into the sphere of freedom. Keynes never abandoned the idea of making the Americans themselves off er the gift, as the result of a sincere appreciation of Britain’s effort in fi nancing the war and her future expected diffi culties – not dissimilarily, at the end of the First World War, Keynes had stressed that the Americans did not have any »obligation« (CW 18: 300) to comply with his proposals for the settlement of inter-allied debts. Moreover, while stressing the need to avoid a bargain between the two powers, and insisting on the »psychological atmosphere of the free gift«, Keynes demonstrated that his proposal, instead of off ering an ambiguity-solving device to come to an agreement otherwise impossible to obtain, was based exactly on that structural uncertainty which, exposing the giver to the risk of no return, can lead actors that previously regarded each other as rivals to gamble on mutual trust (see Caillé 1998). As any ›fi rst‹ gift, the American gift was, in Keynes’s view, the fi rst element of a complex dynamics that required Britain to reciprocate. Yet, Britain’s countergift was but the promise to help the Americans develop the kind of post-war world on which both countries, not only the donor but also the donée, had set their hearts: only a gift, Keynes argued, could allow Britain to face this obligation. Th e Americans, he wrote, were given the historical chance to Carabelli/Cedrini: Keynes’s legacy for our troubled world 319 »make us an off er, not so much generous as just, using their fi nancial strength not as an instrument to force us to their will, but as a means of making it possible for us to participate in arrangements which we ourselves prefer on their merits if only they can be made practicable for us« (CW 24: 272). Th e diff erence between the loan fi nally off ered by the Americans and Keynes’s desired American gift lay in the opposite repercussions they would have respectively had on the receiver’s freedom to choose. As a means of forcing Britain to the American will, a loan would have compelled London to passively accept the American conception of the international economic system. As »an act that widens the scope of freedom for the members of a society« (Godbout 1998: 190), on the contrary, a gift would have granted Britain the freedom to proactively choose and help to shape the multilateral option. For Keynes, freedom is fi rst of all freedom from economic necessity. Some key passages of Keynes’s diplomacy during World War II clearly echo the anti-utilitarianism of his essay Economic Possibilities for Our Grandchildren, his view of wealth as no more than the material precondition for the enjoyment of a happy life and the possibility of individual choice of ends, his vision of the international economic problem as »a transitory and an unnecessary muddle« (CW 9: xvii). However, freedom is for Keynes, more exactly, freedom to choose (see Carabelli/Cedrini 2009b). In the General Th eory, Keynes justifi es his calls for »central controls« (CW 7: 379) as a means to attain full employment while safeguarding the »traditional advantages of individualism«, which »is the best safeguard of personal liberty in the sense that, compared with any other system, it greatly widens the fi eld for the exercise of personal choice. It is also the best safeguard of the variety of life, which emerges precisely from this extended fi eld of personal choice« (380). Public institutions such as the ICU itself have for Keynes the »duty to be altruistic, in defence of the individual« (Carabelli/De Vecchi 2001: 244) and his right to autonomous judgement. Keynes defended the Anglo-American negotiations in the Forties as the »fi rst great attempt at organizing international order out of the chaos of the war in a way which will not interfere with the diversity of national policy yet which will minimize the causes of friction and ill will between nations« (CW 24: 608). While the unrestricted laissez-faire of the late gold standard and interwar period had »mistake[n] private licence for public liberty« (622), his desired international system should be able to compensate the limitation of policy space which is required by global interdependence through a multilateral system explicitly designed to reduce the frictions between national autonomy and adherence to an international regime. A system, in other words, able to solve the dilemmas it raises by managing the co-habitation of diff erent varieties of national capitalism instead of imposing them a one-size-fi ts-all set of right policies. Overseas Financial Policy in Stage III may now fi nally appear as a tester of the leader’s willingness to comply with the revolutionary spirit of the desired new system, despite the rejection of the 320 Intervention. European Journal of Economics and Economic Policies ›freedom-enhancing‹ proposals advanced by Keynes for Bretton Woods. If Keynes is ›fashionable‹ again, this may be due to the core message of his work as an international negotiator: a new successful international system of national capitalisms will be more likely based on consensus upon freedom rather than against it, and one which establishes its ›rules of the game‹ on the need to enlarge, rather than restrict, national autonomy and policy space. Concluding remarks In a way, this paper has tried to demonstrate, to use Kirshner’s words, that »while it is worth revisiting Keynes for what he wrote about – for the revolution in macroeconomics, and the relevance of his ideas for [some] pressing contemporary questions […] – it is also worth remembering how he did it, and why«. (Kirshner 2009: 539) Today’s calls upon Keynes for a new era of prosperity rely upon the recognition of the public-spirited character of his international economics and diplomacy, that is on the belief that his work was directed toward the establishment of a »sounder political economy between all nations« (CW 25: 43). Yet the unprecedented appeal of Keynes’s reform plans challenges a well-established tradition in the history of economic thought that may be named, using the subtitle of the third volume of Skidelsky’s biography of Keynes, the Fighting for Britain view of Keynes’s international economics and diplomacy. Skidelsky tends to incorporate Keynes’s plans for global reforms in the Forties into the more general story of Britain’s (and other debtors’) attempt to secure overdraft facilities for the post-war period (see Skidelsky 2000: 208), thereby ending with conditioning the evaluation of their historical signifi cance to a disenchanted account of the negotiations of the 1945 American loan to Britain, and of Keynes’s eff orts to save his fi nancially exhausted country and its Empire from the »American conception of the international system« (CW 24: 61). By revisiting the ›focus and method‹ of Keynes’s work in international economics and showing the continuity they provide with the methodological positions he adopted in treating the economic material in his theoretical writings, we have tried to prove that the ›Fighting for Britain‹ view has shaky foundations. Keynes was fi ghting through Britain when dealing with the transition to the postwar orders, in the attempt to establish ›shared responsibilities‹ principles as a means to ensure an orderly unwinding of international imbalances; he was fi ghting through Britain when devising a rational international monetary system which could transform the historical advantages of the prewar gold standard into permanent features of the postwar regime; he was fi ghting through Britain when posing the bases for a global system of national capitalisms able to promote, rather than repress, national policy space. It really seems time to rediscover Keynes: not only his specifi c recommendations for global reform, but also, and foremost, the general vision he developed for the analysis of the global economic order throughout his whole life, which may prove precious in identifying the major shortcomings of the current ›non-system‹ and help strength- Carabelli/Cedrini: Keynes’s legacy for our troubled world 321 en the case for coordinated multilateral international adjustment, rational monetary reform, and enhanced policy space. References Aizenman, J. (2007): Large hoarding of international reserves and the emerging global economic architecture, National Bureau of Economic Research Working Paper, No. 13277. Aizenman, J. (2009): On the paradox of prudential regulations in the globalized economy. International reserves and the crisis: A reassessment, National Bureau of Economic Research Working Paper, No. 14779. Bernanke, B.S. (2005): Th e global saving glut and the U.S. current account defi cit, Remarks at the Sandridge Lecture, Virginia Association of Economics, Richmond, Virginia, March 10, URL: http://www.federalreserve.gov/boarddocs/speeches/2005/200503102/default.htm. Caillé, A. (1998): Il terzo paradigma. Antropologia fi losofi ca del dono, Torino: Bollati Boringhieri. Carabelli, A. (1988): On Keynes’ s Method, London: Macmillan. Carabelli, A., Cedrini, M. (2009a): Indian currency and beyond. Th e legacy of the early economics of Keynes in the times of Bretton Woods II, SEMeQ Working Paper, No. 12/09. Carabelli, A., Cedrini, M. (2009b): Th e economic problem of happiness. Keynes on happiness and economics, SEMeQ Working Paper, No. 13/09. Carabelli, A., Cedrini, M. (2010): Current global imbalances: Might Keynes be of help?, in: Marcuzzo, M.C., Hirai, T., Bateman, B. (eds.), Th e Return to Keynes: Keynes and Keynesian Policies in the New Millennium, Cambridge, Mass.: Harvard University Press, 257 – 274. Carabelli, A., Cedrini, M. (forthcoming): Keynes and the complexity of international economic relations in the aftermath of World War I, in: Journal of Economic Issues. Carabelli, A., De Vecchi, N. (2001): Individuals, public institutions and knowledge: Hayek and Keynes, in: Porta, P., Scazzieri, R., Skinner, A. (eds.), Knowledge, Social Institutions and the Division of Labour, Aldershot: Elgar, 229 – 248. Cedrini, M. (2008): Consensus versus freedom or consensus upon freedom? From Washington disorder to the rediscovery of Keynes, in: Journal of Post Keynesian Economics, 30(4), 499 – 522. Cedrini, M. (2010): What was Keynes fi ghting for? A Maussian perspective of Keynes’s economic diplomacy, paper presented at the workshop »Revisiting the Boundaries of Economics: A Historical Perspective«, Collegio Carlo Alberto, Moncalieri (Torino), April 16. Chandavarkar, A.G. (1989): Keynes and India. A Study in Economics and Biography, London: Macmillan. Chinn, M.D. (2005): Getting serious about the twin deficits, Council on Foreign Relations Special Report 10, September, URL: http://www.cfr.org/content/publications/ attachments/TwinDefi citsTF.pdf. Cooper, R. (2004): US defi cit: It is not only sustainable, it is logical, in: Financial Times, October 31, A15, 2004. Cruz, M., Walters, B. (2008): Is the accumulation of international reserves good for development?, in: Cambridge Journal of Economics, 32(5), 665 – 681. 322 Intervention. European Journal of Economics and Economic Policies Davidson, P. (2007): John Maynard Keynes, New York: Palgrave Macmillan. Davidson, P. (2008): Reforming the world’s international money, in: Real-World Economics Review, 48(6), 293 – 305. De Cecco, M. (1979): Origins of the post-war payments system, in: Cambridge Journal of Economics, 3(1), 49 – 61. De Cecco, M. (2001): John Maynard Keynes, in: Rivista di storia economica, 17(3), 373 – 382. Dimand, R.W. (2006): Keynes and global economic integration, in: Atlantic Economic Journal, 34(2), 175 – 182. Dooley, M.P., Folkerts-Landau, D., Garber, P. (2003): An essay on the revived Bretton Woods System, National Bureau of Economic Research Working Paper, No. 9971. Dooley, M.P., Folkerts-Landau, D., Garber, P. (2009): Bretton Woods II still defi nes the international monetary system, National Bureau of Economic Research Working Paper, No. 14731. Eichengreen, B.J. (2004): Global imbalances and the lessons of Bretton Woods, National Bureau of Economic Research Working Paper, No. 10497. Fleming, G. (2000): Foreign investment, reparations and the proposal for an international bank: Notes on the lectures of J.M. Keynes in Geneva, July 1929, in: Cambridge Journal of Economics, 24(2), 139 – 151. Godbout, J.T. (1998): Th e moral of the gift, in: Th e Journal of Socioeconomics, 27(4), 557 – 570. Godbout, J.T. (in collaboration with A. Caillé) (2000): Th e World of the Gift, Montreal: McGillQueen’s University Press. Greenwald, B., Stiglitz, J.E. (2008): A modest proposal for international monetary reform, Paper presented at the International Economic Association Meeting, Istanbul, June, URL: http://www.agn.gov.ar/debitum/nro_6/Biblioteca_virtual/Documentos/ Stiglitz_2008_A_Modest_Proposal.pdf. Keynes, J.M. (1971 – 1989): Th e Collected Writings of John Maynard Keynes, Johnson, E., Moggridge, D.E. (eds.), 30 volumes, London: Macmillan. Kirshner, J. (2009): Keynes, legacies and inquiries, in: Th eory and Society, 38(5), 527 – 541. Kregel, J.A. (2006): Understanding imbalances in a globalised international economic system, in: Teunissen, J.J., Akkerman, A. (eds.), Global imbalances and the US debt problem. Should developing countries support the US dollar?, Th e Hague: Fondad, 149 – 173. Krugman, P. (2007): Will there be a dollar crisis?, in: Economic Policy, 22(51), 435 – 467. Mann, C.L. (2005): Breaking up is hard to do: Global co-dependency, collective action, and the challenges of global adjustment, in: CESifo Forum 1, 16 – 23. Markwell, D.J. (1995): J.M. Keynes, idealism, and the economic bases of peace, in: Long, D., Wilson, P. (eds.), Th inkers of the Twenty Years’ Crisis. Inter-war Idealism Reassessed, Oxford: Clarendon Press, 189 – 213. Markwell, D.J. (2006): John Maynard Keynes and International Relations. Economic Paths to War and Peace, Oxford: Oxford University Press. Moggridge, D.E. (1986): Keynes and the international monetary system 1909 – 46, in: Cohen, J.S., Harcourt, G.C. (eds.), International Monetary Problems and Supply-Side Economics: Essays in Honour of Lorie Tarshis, London: Macmillan, 56 – 83. Carabelli/Cedrini: Keynes’s legacy for our troubled world 323 Moggridge, D.E. (1992): Maynard Keynes: An Economist’s Biography, London: Routledge. Newton, S. (2000): A ›visionary hope‹ frustrated: J.M. Keynes and the origins of the postwar international monetary order, in: Diplomacy and Statecraft, 11(1), 189 – 210. Obstfeld, M., Rogoff , K. (2005): Th e unsustainable US current account position revisited, Paper presented at the NBER conference »G7 Current Account Imbalances: Sustainability and Adjustment«, Newport, RI, June 1 – 2, URL: http:/www.nber.org/books/ curracct/obstfeld-rogoff 6-20-05.pdf. Ocampo, J.A. (2007): Th e instability and inequities of the global reserve system, DESA Working Paper, No. 59. Pressnell, L.S. (1986): External Economic Policy since the War. Vol. 1: Th e Post-War Financial Settlement, London: Her Majesty’s Stationery Offi ce. Rodrik, D. (2006): Th e social cost of foreign exchange reserves, in: International Economic Journal, 20(3), 253 – 266. Skidelsky, R. (2000): John Maynard Keynes. Vol. 3: Fighting for Britain, 1937– 1946, London: Macmillan. Truman, E.M. (2005): Postponing global adjustment: An analysis of the pending adjustment of global imbalances, Peterson Institute for International Economics Working Paper, No. 05 – 6, July. Turnell, S. (2002): Keynes, economics and war: A liberal dose of realism, Research Papers of the Department of Economics of Macquarie University, No. 0207. UNCTAD (2004): Trade and Development Report. Policy Coherence, Development Strategies and Integration into the World Economy, New York and Geneva: Unctad. UNCTAD (2005): Trade and Development Report. New Features of Global Interdependence, New York and Geneva: Unctad. UNCTAD (2006): Trade and Development Report. Global Partnership and National Policies for Development, New York and Geneva: Unctad. UNCTAD (2009): Trade and Development Report. Responding to the Global Crisis, Climate Change, Migration and Developmen, New York and Geneva: Unctad. UNPGA (2009): Report of the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System, URL: http://www.un.org/ga/president/63/commission/fi nancial_commission.shtml. Vines, D. (2003): John Maynard Keynes 1937 – 1946: Th e creation of international macroeconomics. A review article of ›John Maynard Keynes 1937 – 1946: Fighting for Britain‹ by Robert Skidelsky, in: Th e Economic Journal, 113(488), 338 – 361. Williamson, J. (1981): Review of Th e Collected Writings of John Maynard Keynes. Volume XXV. Activities 1940 – 1944. Shaping the Post-War World. Th e Clearing Union; Th e Collected Writings of John Maynard Keynes. Volume XXVI. Activities 1941 – 1946. Shaping the PostWar World. Bretton Woods and Reparations, in: Th e Economic Journal, 91(362), 541 – 544. Wolf, M. (2005): Will Asian mercantilism meet its Waterloo?, Richard Snape Lecture, Melbourne, November 14, URL: www.pc.gov.au/lectures/snape/wolf/wolf.pdf. Zhou, X. (2009): Reform the International Monetary System, Th e People’s Bank of China, Beijing, URL: www.pbc.gov.cn/english.