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Monetary problems of the international economy
Journal of International Economics
l(1971)
127-140.
@ North-Holland Publishing Company
BOOK REVIEWS
Robert A. Mundell and Alexander K. Swoboda, Monetary Problems the International Economy. (Chicago and London, the University Chicago Press, 1969, pp. x, 405.)
of of
One new industry in the 1960s is the holding of conferences on the international monetary system by academic economists with an occasional admixture of central and commercial bankers. One need only mention in alphabetical order Algarve, Bald Peak, Bellagio, Bologna, Brookings, Biirgenstock, Claremont, Chicago, Ditchley . . . to make the point. The rediscovery of money in international economics, somewhat belatedly perhaps, and of Gresham’s law (by Triffin) set monetary economists in motion to the airport, papers in hand. To miss a conference is to be assigned to review the proceedings, either before publication for the university press which gets the duty, or afterward for an economic periodical. The present volume stands out intellectually in the shelf of these proceedings, but presents certain difficulties of reviewmanship. Differentiation was sought by moving from the “older group” of Haberler, Harrod, Machlup, Salant, et al. who grace the occasion by presiding over separate sessions to a younger stratum: Aliber, Balassa, Cooper, Corden, Day, Grubel, Kenen, etc. (Younger, perhaps, but not really young any longer compared with Branson, Laffer, Horst, Willett...) Summaries of the discussion of separate papers are furnished, and a summary of the conference as a whole by Harry Johnson. With its own reviews thus neatly packaged with product, the outside reviewer is hard put to it to find a place to put in his oar. Perhaps one can start, however, with objecting to the way that Mundell, the senior editor, organized the conference. As the title indicates, it is concerned with “problems”. As part of the introduction, after a broad, though French contemplation of the international monetary order by the one non-academic person there, Valery Giscard d’Estaing, later the French Minister of Finance, Mundell outlined the
128
Book reviews
problems of the international monetary system as he sees them. These turn out to be analytical problems which emerge from Mundellian thought rather than, as claimed, problems which arise from the real world and fit into no sensible scheme of intellectual architecture. They are the adjustment, assignment, crisis, optimum-currency, redundancy, seignorage problems, intellectual in origin, on the whole rather than action-oriented, I happen to be near the bottom of the profession in my enthusiasm for the semantic approach to international monetary relations, but I find the confusion between intellectual puzzles and practical problems, and the random order, irritating. The Machlup-Fellner-Triffin schema for dividing international monetary reform into problems of adjustment, confidence and liquidity is a more satisfying way of organization. Perhaps still a better way, focussed on theory, would be to assert that international monetary economics is concerned with the amount(s) and kind(s) of money issued in a world of more than one political unit, the relations between such monies, if there be more than one, and between their associated money and capital markets and their economies more broadly. This provides an organizational principle into which Mundell’s list of problems can fit, but raises several further issues that the Chicago conference largely slighted: how, for example, to define equilibrium and disequilibrium in the balance of payments of a country with a dominant capital market; the familiar Triffin problem posed by Gresham’s law with two or more reserve assets growing at different rates; international financial intermediation, its use and abuse; the viability of a system with a series of national money and capital markets of equal size and efficiency, as contrasted with a system ordered in hierarchical progression, from broader and more efficient to narrower and less efficient. On this last point, Cooper’s brilliant comment on the Assignment Problem makes clear the difficulties of running a decentralized system of decisionmaking with multiple targets and multiple policy instruments, even when numbers of variables and targets are equal, and targets converge. It takes practice to steer the rear wheels of the hook and ladder even when the rear driver wants to follow the front one. But neither Cooper nor Mundell evaluate the desirability of leadership or unified decisionmaking, at least on such an issue as rediscounting in crisis. The lender of last resort must have a mixture of one mind. It is churlish, however, to complain about what is missing when the fare is so abundant and rich. The most seminal paper, if it is not invidious to say so, is McKinnon’s on the role of money in the
Book reviews
129
adjustment process. This is must reading for the older members of the profession as well as for graduate students. Alexander joined the analysis of the price adjustment mechanism to that of income. With trade and capital movements, however, it is necessary to think not only about who absorbed in excess of or less than income, but in what form. McKinnon undertakes to add money to income and price by using a stock or portfolio approach instead of the usual one of flows. This is a technique which currently bemuses the econometricians (unrepresented in this volume) in search of better R-squares, t-statistics, Durbin-Watson numbers. But the models have not been fully elaborated. McKinnon makes a beginning. One can argue that with perfect markets, the distinction between stocks and flows is of little importance. Flows are equivalent to stocks, capitalized at some rate of interest, and stocks give rise to flows of earnings or opportunity costs. In many of these papers, the analysis is either in terms of perfect.markets or perfectly separated markets. But the issues in international money turn largely on imperfectly joined markets, as I have learned from my seminar this last term on forward exchange. McKinnon’s paper makes a beginning, but there is much work here for theorists as well as for empiricists. A great deal of the other discussion represents valuable additions to the literature. Grubel and Corden, with the assistance of Johnson, advance the discussion of the “seignorage” problem, which arose when the less developed countries thought that the financial centers were exploiting the rest of the world, in creating paper money. Seignorage is the producer’s surplus in the production of money. When commodity money is produced at constant costs there is none; when it is produced by a monopoly at zero costs, and spent, the seignorage is equal to the value of the money. If interest is paid at competitive rates, or valuable services provided up to the level of interest cost, money creation is just another form of borrowing. Where two or more countries swap liabilities for claims amongst themselves, and hold the proceeds as liquidity, without spending them for real assets, there is financial intermediation, but no seignorage. If developed countries were to create money which they gave to LDCs and then earned back with real goods, it would be to create money with real goods and services just as in the case of mined gold, as Johnson points out. Some of the ideas do not come off very well, as the record of the debate shows. Aliber argues for a tax on imports and a subsidy on exports as a substitute for exchange depreciation, and earns the wrath
130
Book reviews
of a specially submitted comment by Haberler. (A paper by Philip Cortney on the raising of the price of gold was also submitted but not published; Mundell’s comment that gold is inside money and foreign exchange outside money, which should be explored along Patinkin lines, though with other ends in view than the real balances’ effect, is worth pursuing.) Kenen’s hypothesis that the optimum currency area has diversified resources, rather than specialized, seems to be another way of expressing McKinnon’s 1963 point, that the optimum currency area must trade so little with the outside world that it has foreignexchange illusion. Monetary theorists do not as a rule believe in money illusion, except when it is needed to support a policy of flexible exchange rates. Sohmen thinks of an optimum currency area as one in which the forward price of each currency sells at par in terms of the other. But this is because there is no interest differential, money and capital markets are perfectly joined, and there is in fact only one money. The reasoning is circular. The forward price of a dollar in terms of dollars in one dollar. That hardly makes the dollar an optimum currency area. One should mention the esoteric and interesting paper by Yeager on flexible exchange rates in Austria and Russia in the 19th century, the one relatively stable, the other unstable. The other flexible exchange rate enthusiast (apart from Marsh who celebrates the Canadian experience in a Comment) Sohmen, was given the assignment problem but managed to work in the traditional discussion of fixed versus flexible rates. In discussing Institutional Restraints, A.C.L. Day finds an extra degree of freedom on p. 336, but loses it three pages later when he acknowledges that under flexible rates the exchange rate must be left entirely free, which adds little to policy variables; may be left free by one country but managed by the others, in which instance one country’s extra degree of freedom is a gift from the other; or may be altered by joint agreement after bargaining, putting us back to the Cooper world of interdependence rather than independence. There is nothing in this volume about creeping, crawling, sliding, or slithering pegs, which is because the conference was held too early for this idea, in 1966. These will be the subject of a new volume on the Burgenstock papers. I have omitted mention of one or two main papers and of most of the comments. The level of discussion is high, and if it does not seem to be unified, it is because unity is the product of a single mind, not of a conference.
Book reviews
131
Many of the components of an international monetary theory are contained in these pages. The coherent structure such as produced by a Friedman, Modigliani or Patinkin is still missing. The obvious candidate for producing such a grand synthesis is the man who has a theory and has produced many of the parts, Mundell himself. Prisoner-of-war interrogation reports in Britain during the war used Mine concerns Sohmen’s analogy to conclude with a “tailpiece”. between flexible exchange rates and railroad tracks; he favors smooth grades rather than discrete changes in altitude, attacking the latter as a “hiccup” system. I am a metaphor man myself. Let’s see Sohmen devise a system in which water levels in canals are changed not by hiccups at locks, but in creeping gradients. Money is like language, and like time. A recent paper by Kirschen likens it to religions (the golden calf, mono-, duo-, polytheism, etc.). When Sohmen contemplates his orderly railroads with their 2 percent grades, hauling heavy loads long distances, he forgets not only the lowly canal, but also the chaotic roller-coaster.
Massachusetts
W.Arthur Lectures,
C.P. Kindleberger Institute of Technology
Lewis, Aspects of Tropical Trade, 1883-1965. The Wicksell 1969. (Stockholm: Almqvist and Wicksell 1969).
The Wicksell Lectures are without doubt the most distinguished lecture series in economics in the world today, judging by both the eminence of the lecturers and the scholarly content of the lectures viewed as a series of individual performances. Their only serious shortcoming is that the arrangements for distribution of the published lectures fall far short of what such an important series deserves, so that one is largely dependent on being lucky enough to be on an individual Lecturer’s offprint distribution list to receive timely knowledge of each year’s Lectures. Could the Wicksell Lecture Society consider introducing either a subscription arrangement for the Lectures, or a life subscription to the Society entitling the member to automatic receipt of the’ Lectures as they appear? In any case, the deficiency justifies a longer review of the latest Lectures than is usual. Professor Arthur Lewis’s two lectures on “Aspects of Tropical Trade” add distinction to an already distinguished list. They carry on
l(1971)
127-140.
@ North-Holland Publishing Company
BOOK REVIEWS
Robert A. Mundell and Alexander K. Swoboda, Monetary Problems the International Economy. (Chicago and London, the University Chicago Press, 1969, pp. x, 405.)
of of
One new industry in the 1960s is the holding of conferences on the international monetary system by academic economists with an occasional admixture of central and commercial bankers. One need only mention in alphabetical order Algarve, Bald Peak, Bellagio, Bologna, Brookings, Biirgenstock, Claremont, Chicago, Ditchley . . . to make the point. The rediscovery of money in international economics, somewhat belatedly perhaps, and of Gresham’s law (by Triffin) set monetary economists in motion to the airport, papers in hand. To miss a conference is to be assigned to review the proceedings, either before publication for the university press which gets the duty, or afterward for an economic periodical. The present volume stands out intellectually in the shelf of these proceedings, but presents certain difficulties of reviewmanship. Differentiation was sought by moving from the “older group” of Haberler, Harrod, Machlup, Salant, et al. who grace the occasion by presiding over separate sessions to a younger stratum: Aliber, Balassa, Cooper, Corden, Day, Grubel, Kenen, etc. (Younger, perhaps, but not really young any longer compared with Branson, Laffer, Horst, Willett...) Summaries of the discussion of separate papers are furnished, and a summary of the conference as a whole by Harry Johnson. With its own reviews thus neatly packaged with product, the outside reviewer is hard put to it to find a place to put in his oar. Perhaps one can start, however, with objecting to the way that Mundell, the senior editor, organized the conference. As the title indicates, it is concerned with “problems”. As part of the introduction, after a broad, though French contemplation of the international monetary order by the one non-academic person there, Valery Giscard d’Estaing, later the French Minister of Finance, Mundell outlined the
128
Book reviews
problems of the international monetary system as he sees them. These turn out to be analytical problems which emerge from Mundellian thought rather than, as claimed, problems which arise from the real world and fit into no sensible scheme of intellectual architecture. They are the adjustment, assignment, crisis, optimum-currency, redundancy, seignorage problems, intellectual in origin, on the whole rather than action-oriented, I happen to be near the bottom of the profession in my enthusiasm for the semantic approach to international monetary relations, but I find the confusion between intellectual puzzles and practical problems, and the random order, irritating. The Machlup-Fellner-Triffin schema for dividing international monetary reform into problems of adjustment, confidence and liquidity is a more satisfying way of organization. Perhaps still a better way, focussed on theory, would be to assert that international monetary economics is concerned with the amount(s) and kind(s) of money issued in a world of more than one political unit, the relations between such monies, if there be more than one, and between their associated money and capital markets and their economies more broadly. This provides an organizational principle into which Mundell’s list of problems can fit, but raises several further issues that the Chicago conference largely slighted: how, for example, to define equilibrium and disequilibrium in the balance of payments of a country with a dominant capital market; the familiar Triffin problem posed by Gresham’s law with two or more reserve assets growing at different rates; international financial intermediation, its use and abuse; the viability of a system with a series of national money and capital markets of equal size and efficiency, as contrasted with a system ordered in hierarchical progression, from broader and more efficient to narrower and less efficient. On this last point, Cooper’s brilliant comment on the Assignment Problem makes clear the difficulties of running a decentralized system of decisionmaking with multiple targets and multiple policy instruments, even when numbers of variables and targets are equal, and targets converge. It takes practice to steer the rear wheels of the hook and ladder even when the rear driver wants to follow the front one. But neither Cooper nor Mundell evaluate the desirability of leadership or unified decisionmaking, at least on such an issue as rediscounting in crisis. The lender of last resort must have a mixture of one mind. It is churlish, however, to complain about what is missing when the fare is so abundant and rich. The most seminal paper, if it is not invidious to say so, is McKinnon’s on the role of money in the
Book reviews
129
adjustment process. This is must reading for the older members of the profession as well as for graduate students. Alexander joined the analysis of the price adjustment mechanism to that of income. With trade and capital movements, however, it is necessary to think not only about who absorbed in excess of or less than income, but in what form. McKinnon undertakes to add money to income and price by using a stock or portfolio approach instead of the usual one of flows. This is a technique which currently bemuses the econometricians (unrepresented in this volume) in search of better R-squares, t-statistics, Durbin-Watson numbers. But the models have not been fully elaborated. McKinnon makes a beginning. One can argue that with perfect markets, the distinction between stocks and flows is of little importance. Flows are equivalent to stocks, capitalized at some rate of interest, and stocks give rise to flows of earnings or opportunity costs. In many of these papers, the analysis is either in terms of perfect.markets or perfectly separated markets. But the issues in international money turn largely on imperfectly joined markets, as I have learned from my seminar this last term on forward exchange. McKinnon’s paper makes a beginning, but there is much work here for theorists as well as for empiricists. A great deal of the other discussion represents valuable additions to the literature. Grubel and Corden, with the assistance of Johnson, advance the discussion of the “seignorage” problem, which arose when the less developed countries thought that the financial centers were exploiting the rest of the world, in creating paper money. Seignorage is the producer’s surplus in the production of money. When commodity money is produced at constant costs there is none; when it is produced by a monopoly at zero costs, and spent, the seignorage is equal to the value of the money. If interest is paid at competitive rates, or valuable services provided up to the level of interest cost, money creation is just another form of borrowing. Where two or more countries swap liabilities for claims amongst themselves, and hold the proceeds as liquidity, without spending them for real assets, there is financial intermediation, but no seignorage. If developed countries were to create money which they gave to LDCs and then earned back with real goods, it would be to create money with real goods and services just as in the case of mined gold, as Johnson points out. Some of the ideas do not come off very well, as the record of the debate shows. Aliber argues for a tax on imports and a subsidy on exports as a substitute for exchange depreciation, and earns the wrath
130
Book reviews
of a specially submitted comment by Haberler. (A paper by Philip Cortney on the raising of the price of gold was also submitted but not published; Mundell’s comment that gold is inside money and foreign exchange outside money, which should be explored along Patinkin lines, though with other ends in view than the real balances’ effect, is worth pursuing.) Kenen’s hypothesis that the optimum currency area has diversified resources, rather than specialized, seems to be another way of expressing McKinnon’s 1963 point, that the optimum currency area must trade so little with the outside world that it has foreignexchange illusion. Monetary theorists do not as a rule believe in money illusion, except when it is needed to support a policy of flexible exchange rates. Sohmen thinks of an optimum currency area as one in which the forward price of each currency sells at par in terms of the other. But this is because there is no interest differential, money and capital markets are perfectly joined, and there is in fact only one money. The reasoning is circular. The forward price of a dollar in terms of dollars in one dollar. That hardly makes the dollar an optimum currency area. One should mention the esoteric and interesting paper by Yeager on flexible exchange rates in Austria and Russia in the 19th century, the one relatively stable, the other unstable. The other flexible exchange rate enthusiast (apart from Marsh who celebrates the Canadian experience in a Comment) Sohmen, was given the assignment problem but managed to work in the traditional discussion of fixed versus flexible rates. In discussing Institutional Restraints, A.C.L. Day finds an extra degree of freedom on p. 336, but loses it three pages later when he acknowledges that under flexible rates the exchange rate must be left entirely free, which adds little to policy variables; may be left free by one country but managed by the others, in which instance one country’s extra degree of freedom is a gift from the other; or may be altered by joint agreement after bargaining, putting us back to the Cooper world of interdependence rather than independence. There is nothing in this volume about creeping, crawling, sliding, or slithering pegs, which is because the conference was held too early for this idea, in 1966. These will be the subject of a new volume on the Burgenstock papers. I have omitted mention of one or two main papers and of most of the comments. The level of discussion is high, and if it does not seem to be unified, it is because unity is the product of a single mind, not of a conference.
Book reviews
131
Many of the components of an international monetary theory are contained in these pages. The coherent structure such as produced by a Friedman, Modigliani or Patinkin is still missing. The obvious candidate for producing such a grand synthesis is the man who has a theory and has produced many of the parts, Mundell himself. Prisoner-of-war interrogation reports in Britain during the war used Mine concerns Sohmen’s analogy to conclude with a “tailpiece”. between flexible exchange rates and railroad tracks; he favors smooth grades rather than discrete changes in altitude, attacking the latter as a “hiccup” system. I am a metaphor man myself. Let’s see Sohmen devise a system in which water levels in canals are changed not by hiccups at locks, but in creeping gradients. Money is like language, and like time. A recent paper by Kirschen likens it to religions (the golden calf, mono-, duo-, polytheism, etc.). When Sohmen contemplates his orderly railroads with their 2 percent grades, hauling heavy loads long distances, he forgets not only the lowly canal, but also the chaotic roller-coaster.
Massachusetts
W.Arthur Lectures,
C.P. Kindleberger Institute of Technology
Lewis, Aspects of Tropical Trade, 1883-1965. The Wicksell 1969. (Stockholm: Almqvist and Wicksell 1969).
The Wicksell Lectures are without doubt the most distinguished lecture series in economics in the world today, judging by both the eminence of the lecturers and the scholarly content of the lectures viewed as a series of individual performances. Their only serious shortcoming is that the arrangements for distribution of the published lectures fall far short of what such an important series deserves, so that one is largely dependent on being lucky enough to be on an individual Lecturer’s offprint distribution list to receive timely knowledge of each year’s Lectures. Could the Wicksell Lecture Society consider introducing either a subscription arrangement for the Lectures, or a life subscription to the Society entitling the member to automatic receipt of the’ Lectures as they appear? In any case, the deficiency justifies a longer review of the latest Lectures than is usual. Professor Arthur Lewis’s two lectures on “Aspects of Tropical Trade” add distinction to an already distinguished list. They carry on