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July 1-22, 1944, Bretton Woods, New Hampshire:

The Forgotten Anniversary

 By Shlomo Maital  

Hotel Mt. Washington, Bretton Woods, NH

    Today, July 20, the 50th anniversary of Neil Armstrong’s Apollo landing on the moon – and all the media are obsessively recounting, replaying, and reliving it. We learn about the world-shaking debate, whether Armstrong said “one small step for A man”, as intended, or whether he skipped the “a”. (Complex voice analysis has been done to resolve this world-shaking question).

     There is another anniversary, ignored – and far more important:   The 75th anniversary of the Bretton Woods, New Hampshire, conference, July 1-22, attended by the Allies, that redesigned the architecture of the world economy. It was done in 21 days, because the wealthy Boston millionaires had booked the Hotel, Hotel Mt. Washington, for their summer vacation. That is symbolic, because ultimately, it is the 0.001% billionaires who are destroying the amazing system built in just 3 weeks in New Hampshire.

     Leading the US delegation was a Treasury official, a bureaucrat, Harry Dexter White. Leading the British delegation was the most renowned economist of his time, John Maynard Keynes. Keynes had the intellectual firepower. But White had the powerful US economy behind him. Keynes’ plan was to create a world central bank. White said, no, we already have one – the dollar will be the world’s currency.

     White won.

       At the beautiful old wooden hotel, the delegates created the I.M.F., World Bank, General Agreement on Tariffs and Trade and the Bank for International Settlements. They laid the foundation for a global trading system with zero tariffs (“Most Favored Nation”) that led to massive creation of jobs, exports and wealth, mostly in Asia but in war-torn Europe as well.

       The system created in Bretton Woods 75 years ago has served the world well. It helped China boom, as well as Japan, Taiwan and Korea, and India too. It helped Europe unify. It may have prevented a new World War. And ultimately, it sank the U.S.S.R. by showing that free markets worked best.

       The Bretton Woods agreement has affected everyone, mostly for the good. But – it had a fatal flaw. When you create opportunities for some people to grow wealthy, by definition you also create dilemmas in which many people (unable to compete) become poorer. So what was lacking at Bretton Woods was one thing – a truly effective mechanism to redistribute wealth, for people and countries left behind.

     Ultimately, that small omission is destroying the Bretton Woods system. It is bringing ‘populist’ leaders who ignite trade wars, foster xenophobia, build walls and claim to prioritize their own countries, other nations be damned.

       Let us celebrate Bretton Woods’ Diamond Anniversary. Let’s remember the enormous benefits it brought. Let’s remind ourselves that much of the Bretton Woods system is worth preserving and strengthening, while fixing the flaws.

       I was two years old in 1944. Most people alive today were born long after Bretton Woods. Most do not even know what was done at Bretton Woods or how it affected them.

       I wish the media could leverage this crucial Diamond Anniversary to remind everyone, to educate people, to reaffirm the ultimate value to humanity of free, open trading, of commitment to creating value for the world, not just for white American males, and to take responsibility (as the US did in 1944) for struggling nations left behind.  

         I just searched Google News. The Financial Times did print a couple of pieces on Bretton Woods. So did TIME magazine.  It’s barely a ripple…not even that.

        

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 A Deep Contrite Apology to the people of Greece

By Shlomo  Maital

Greece

      Greece’s new prime minister Alexis Tsipras has been sworn in and vows to lead an anti-austerity coalition.   He could possibly lead Greece out of the euro and back to the drachma.  This would be unspeakably painful for Greece, in the short run, but possibly best in the long run.

      Meanwhile,  we economists all owe Greece an apology. We have caused immense suffering, needlessly, to 11 million innocent Greeks.  According to Nobel Laureate Paul Krugman, economists drafted the ‘troika’ agreement in May 2010, under which the IMF, European Central Bank and European Commission lent Greece money, in return for extreme austerity.    Greece had no choice in the matter. 

    This document assumed Greece would suffer only a small contraction in 2011 and by 2012 would be recovering.  Yes, unemployment would rise to 15 per cent (Would Merkel’s Germany ever accept such a scenario??) in 2012, but then it would fall rapidly.  Why?  Because austerity would work quickly, heal Greece’s economy, and restore growth.

    Really?  Did the troika economists ever find a single (just one! One!) example in history where austerity worked? 

    No. There are none.

    Instead, Greece suffered a depression, 28 per cent unemployment,  its young people migrated abroad, learning German for instance, and youth unemployment reached nearly 60 per cent. 

     Greece kept its part of the bargain, slashing public spending by 20 per cent.  But the promised benefits of austerity turned out to be disaster.  That is why Tsipras won the election.  And it is why the euro has dived.  The EU and its economists brought it on themselves. 

      It isn’t complicated at all.  To heal a budget deficit, you need a growing economy, because when the GDP grows, tax revenues grow much faster, 1.5 times faster.  To get a growing economy, you need spending and demand.  If people can’t spend, because they have no jobs and their wages are falling, only the government can take up the slack. But if you slash government budgets, the economy will shrink, not grow, and the debt problem will become even worse.  That is what ‘austerity’ does.   It’s pretty simple.

On behalf of my fellow economists, I would like to apologize to the people of Greece. We screwed up.  And worse of all —  none of those responsible seem willing to admit it. 

IMF – Oops! We Got It Wrong!

By Shlomo Maital  

IMF

 

 The International Monetary Fund (IMF) was invented at Bretton Woods, NH, in July 1944.  It is headquartered in Washington, DC and its task is to bail out companies that get into financial trouble, overspending, overborrowing, etc.   And this happens often.

   The IMF is an exemplary organization. It has among the world’s best economists (its former deputy director was Stan Fisher, formerly head of Israel’s Central Bank, now Vice Chair of the U.S. Fed), and it even has an independent evaluation board that checks whether it has acted correctly.

   Now, this independent board has reported that..the IMF erred.  Ooops.

   Initially, when the global crisis broke out in 2007-8, the IMF recommended that governments support the economy, and indirectly its banks and financial institutions,  by using fiscal policy, i.e. deficit spending.  But then, the IMF switched direction, under pressure perhaps from capital markets, and said that governments should impose AUSTERITY,   cut spending, cut borrowing.

    Bad idea.  The independent IMF board said:  the IMF erred. It recommended austerity too early.  Perhaps, it should not have recommended austerity at all.

    It is sad when the world’s fireman, the world’s Mother Hen telling its chicks what the right thing to do is,  admits it blundered.  And sad when economics makes a mistake that is costly for hundreds of millions of people. 

It will be hard for even a serious body like the IMF to regain its credibility in future.

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
September 2019
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