seek to negate it. Therefore, an understanding needed to be reached among the three major countries. A conference was organised in London in 1933 to stabilise ERs and to take steps to revive the world economy.
The British, French and American experts while agreeing on the necessity of doing this disagreed on the sequencing of the measures. The Americans and French held that the return of sterling to gold at an as yet unspecified parity was a prerequisite for cooperative measures in other areas. Without exchange stabilisation, no country could undertake monetary expansion or the reduction of trade and exchange restrictions without risking an unfavourable external position. The British experts, while believing in the virtues of a reformed GS, thought that sterling could be stabilised only after (1) the adoption of expansionary measures in the major countries that would increase commodity prices to cover production costs; (2) the reduction of barriers to trade and payments; (3) the acceptance of gold economy measures; and (4) cooperative central bank measures to provide special credits to debtor countries, leading to revival of international capital flows.
The new President, Roosevelt, agreed to honour the previous president’s commitment to attend though the US dollar had gone off gold and even though he was very sceptical about the conference. He thought that the others would merely try to inveigle him to go back to the GS which Roosevelt did not want to do (Clarke, 1973). The Roosevelt administration was very suspicious about UK motives about their desired value for the dollar–sterling ER. He also wanted the meeting to be held after initiating his domestic programme. The main aim of President Roosevelt seems to have been to avoid anything that limited his ability to adopt any policies that he thought necessary for recovery. Not only commercial policy, tariffs and import quotas but also exchange rate policy was frequently directed to the attainment of what was perceived to be national advantage, while the cost to other countries and possible feedbacks were accorded little importance or ignored. The London Conference sought to reach agreement on ERs as well on measures to revitalise the world economy.
Agreement was soon reached among the technical experts about how to stabilise the three currencies. But negotiations on the other main issue, the measures necessary for recovery of the economies, did not make adequate headway. Every time there was news that agreement was about to be reached on ERs, the dollar appreciated and the US stock market declined. When hopes for an agreement receded, the stock market recovered and the dollar depreciated. These helped US recovery. Thus, President Roosevelt torpedoed the ER agreement also. No agreement was reached at London in order not to impede the recovery of the US economy.29,30 Later in 1935 a weak tripartite agreement was reached between England, France and the US under which the countries agreed to stabilise ERs at prevailing rates and not to engage in competitive depreciations. However, there was no specific plan on actions to stabilise the ERs.
Prospects for Cooperation at the G20
In contrast to the inter-war period, there are a host of institutions that seek cooperative solutions in their field. We have institutions developing rules and procedures in areas such as banking, insurance and stock exchanges. These rules and procedures bring about greater certainty and uniformity in regulations, which in turn reduces the uncertainties companies face.31 Also, under the aegis of the GATT/WTO, rules for the conduct of trade policy have been agreed upon. These rules have prevented any substantial increase in protection since the crisis unlike in the 1930s. Furthermore, countries have not been compelled to institute restrictive trade measures because of BOP reasons as the IMF can provide BOP financing to countries in need, whereas the absence of any such lender in the inter-war period had also often frozen private BOP financing.
Despite all these institutional innovations, recovery has been very slow. This seems to be that the basic model of economic behaviour on which policy is based is the same as that which had existed in the inter-war years even though ERs are now flexible in many countries rather than being fixed. Central banks are now independent. Furthermore, their mandate in many countries is merely to control the rate of inflation. This is supposed to provide stable expectations that would encourage investment. But the stability that is provided is slanted towards deflation, even though most central banks undertake to target a rate of inflation of 2% with a margin of 2% on either side, i.e. keep inflation between 2% and 4%. But suppose the rate of inflation rises from 1% to 1.5%, there is an immediate clamour to raise interest rates.32 Hence, the expectation is that with the slightest recovery, interest rates will be raised. Thus, monetary policy is biased towards deflation.
Fiscal policy has also been rendered ineffective. It is not supposed to be very effective in tackling short-term fluctuations and is supposed to be geared towards long-term growth. In fact, modern macro is geared towards the long-term and does not really deal with short-term fluctuations. That is why even at the Toronto summit in 2009 there was a strong group of countries arguing that budget deficits should be reined in order to provide a conducive atmosphere for private investment — the same arguments that were made in the 1930s to rein in budget deficits.
Today also there is a shift in the balance of power and no hegemon may exist. But cooperative practices are more deeply entrenched. When the IMF had to raise fresh resources in 2008, China and India agreed to provide them without any quid pro quo. At the time of the 1997 Asian Financial Crisis, there were fears that China may also devalue its currency in order to maintain export competitiveness. But it did not do so. The newer powers have been more cooperative than the US had been then as their economies are much more dependent on the world economy.33
The main role we envisage for the G20 is for leaders to exchange views about how they see their economies evolving. In particular, they can inform their peers how policy in their country is likely to be so that other countries can base their policies on a proper assessment of policies in other countries and would not be faced by surprises. A recovery of the world economy would have to depend on what is the right model of the world economy and what role there is in it for policy.
References
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