Review of "Reforming the World Monetary System" of Carol M. Connell, by Paulo Roberto de Almeida

This book appears in a Financial History series of the Pickering & Chatto, which has already published as diverse studies in this area as one on Argentina’s parallel currency, another on the federal banking in Brazil, with most of titles being about banking and finance in the North Atlantic world, from the colonial times to the 20th century. Carol Connell is Professor of Finance and Business Management at the School of Business, Brooklyn College, City University of New York, where she is very well rated by her students; and she is now directing a new monograph series on Modern Heterodox Economics, also being published by Pickering & Chatto. Connell prepared this very well researched work benefitting from a fellowship research grant from the Earhart Foundation, a private charitable institution that funds scholarly research; one of its early beneficiaries was Friedrich von Hayek, who wrote The Road to Serfdom (1944).

Some scenarios and arguments presented in this book were first made public in academic publications, such as the Journal of Management History and the Journal of the History of Economic Thought, and Connell’s interest in Fritz Machlup career and work arose when she was researching about one of his students, the growth theorist Edith Penrose. Besides the preeminent presence of Machlup, the book also deals with the contributions for the discussion and reform of the international financial and monetary system by luminaries such as Robert Triffin, William Fellner, and Milton Friedman.

In the introduction the author states very clearly that her objective was the study of the complex reform process that, from the Sixties up to the Seventies, led to the adoption of a flexible exchange rate – instead of the fixed parity established at the Bretton Woods conference (1944) – and the introduction of the special drawing rights as the main “currency” of the International Monetary Fund (p. 1). Based on archival and published sources, the book follows, in thirteen extensively annotated chapters, the itinerary of the Bellagio Group, established under the leadership of Fritz Machlup, and integrated by 32 non-government academic economists, working in intimate contact with policy makers and IMF officials, between 1963 and 1977. Bellagio Group’s primary documents are everywhere referenced, but there are also 299 secondary sources in the bibliography, among them (besides the four big economists), Charles Kindleberger, Edith Penrose, Fred Bergsten, and John Williamson.

Trying perhaps to emphasize the current appeal of her study to contemporary policymakers and researchers, Connell states in her Introduction that there could be in Machlup’s approach something similar to the Group of Twenty Finance Ministers and Central Bank Governors (G20), which is clearly a non performing analogy, essentially because of the independence of views of the former vis-à-vis the narrow interests of today’s governments. Notwithstanding, Bellagio Group worked in close contact and cooperation with the Group of Ten, launched simultaneously within the IMF. The intention of the Treasury Secretary Douglas Dillon was to devise a monetary reform in an already stressed arrangement, in a context when the ten most important countries tried to control and minimize the imbalances of the world economy, the growing liquidity crises, and the volatility in the price of gold (partially circumvented by the introduction of swap facilities and the creation of the General Arrangements to Borrow).

After explaining her research questions and original hypothesis, and informing where Machlup’s and Triffin’s papers are located (Hoover and Yale), Connell opens Chapter 1 by describing the crisis of confidence that arouse in early Sixties, leading to the various exercises of academic debates and institutional brain-storming that mobilized the most important economist of that decade. Late in the Fifties, Robert Triffin was already predicting a forthcoming crisis, and calling for a radical reform of the monetary system in his Gold and the Dollar Crisis (1960). Feeling challenged by the convening by Dillon of an IMF Studies Group, within the Group of Ten, and excluding academic economists, Machlup, Triffin and Fellner decided to “embark on their own study, involving economists of widely divergent views and with no problem or proposal considered ‘out of bounds’. Hence the idea for a series of alternative conference was born” (p. 18), and that was the Bellagio Group, which first met at this Italian resort of the Lake of Como. A brief chronology of the monetary system events from 1944 and 1977 and a synthetic table on the various exchange rate policies and regimes (from gold standard to flexible) close this chapter.

Chapter 2 introduces the life and thought of Fritz Machlup, who had been working and publishing in the area of monetary reform for many years before the convening of his “child”, the Bellagio Group. Born (1902) in a pre-1914 Europe (Austria) with “ten currencies, all with fixed gold parities and fixed exchange rates”, Machlup soon afterwards (1920) was presented to a continent with “twenty-seven paper currencies, none with a gold parity, none with fixed exchange rates and several of them in various stages of inflation or hyperinflation” (p. 23). From 1923 to 1962 Machlup studied and published extensively on monetary problems, particularly the gold standard, but also dealt with patents, industrial organization, production of knowledge and theory of the firm. His 1923 dissertation on the gold-exchange standard at the University of Vienna was supervised by Ludwig von Mises; a decade later he was already residing in the U.S. and teaching at the University of Buffalo; at that time, “he was already the first economist to frame the discussion of balance of payments problems in terms of payments adjustment, liquidity and confidence” (p. 27). John Williamson, a former student, “attributed Machlup’s belief in the importance of the confidence to the role it had played in the collapse of the gold-exchange standard during the Great Depression” (p. 29). The same would occur thirty years later, with the U.S. involvement with and expenditures for the Vietnam’s War, and European countries distrust of America’s capacity to honor its commitments under Bretton Woods. Machlup anticipated the scenario with his lengthy essay “Plans for Reform of International Monetary System”, first published in 1962 and reissued in 1964, significantly updated (p. 32).

Chapter 3 is dedicated to Robert Triffin – a Belgian who worked for the Federal Reserve and the IMF, and professor at Yale from 1951 to 1977 – and to the 1959 Triffin Plan, proposing the replacement of gold and foreign-exchange reserves by gold-guaranteed deposit accounts at the IMF, within a more flexible system. But, at that time, as argued by Charles Kindleberger, even if many economists proposed the idea, “few central bankers recommended flexible exchange rates as a means of eliminating … all the problems of adjustment, liquidity and confidence” (p. 42). Even if Triffin’s solution could be first-best economically, it was politically out of question. The head of the Group of Ten at IMF, Otmar Emminger, “found the Triffin Plan unacceptable because nations were not prepared to hand over so much responsibility and financial power to an international body” (p. 42). At that juncture, confidence, not liquidity, was the problem that made Triffin and Machlup to come together intellectually (p. 47).

Chapter 4 deals with Budapest born (1905) William Fellner, a fugitive from the Nazis, like the two others; professor at Berkeley in 1939, he worked mainly at the intersection of macro and microeconomics, researching and writing about inflation, regulation, growth and balance of payments problems, including in cooperation with the other two in monetary and exchange questions, both in theory and policy. In 1963, he was dealing with budgetary deficits and their consequences, which led to adjustments efforts, and also to the confidence question. Differently from the planned equilibrium advocated by Triffin, Fellner “recommended instead letting free-market processes perform more of the equilibrating function”(p. 57). In many papers, he proposed a limited exchange-rate flexibility system. In fact, both Machlup and Fellner were committed to freely floating exchange-rates, but were aware of the responsibility of national governments, which led them to explore a myriad of possible solutions.

The title of Chapter 5, Why Economists Disagree, takes its name from Machlup’s speech before the American Philosophical Society, in November 1964, five months after the fourth Bellagio Group conference. He explained then his decision to invite 32 economists from eleven countries, most of them from divergent schools of thought, to explore solutions for the problems of the international monetary system of the 1960s. They had to consider hybrid or compromise solutions for the identified problems. This chapter presents each one of the participants, their background and works. The sources of disagreement are very well abridged in a table dealing with the four major policy proposals for reform: semi-automatic gold standard, centralized international reserves, multiple currencies and/or flexible exchange rates (p. 76-78). All proposals were carefully examined at a series of scenario-planning exercises through various Bellagio conferences, allowing the economists to evaluate the “relative impact on payments, liquidity and confidence of the four basic exchange regimes, given any one or combination of them might have been adopted” (p. 80).

Chapters 6 and 7 deal, respectively, with the hypothesis of multiple reserve currencies and Milton Friedman’s arguments for fixed versus flexible exchange rates, in a paper he presented in 1953, making the case for a floating regime. This regime, for him, “has the advantage of monetary independence, insulation from real shocks, and a less disruptive adjustment mechanism in the face of nominal rigidities than it is the case with pegged exchange rates” (p. 99). These two chapter are of a more theoretical and historical nature, despite the fact that all questions discussed in them had a very practical impact on each devised solution for the problems plaguing the international monetary system.

Chapter 8, Collaboration With the Group of Ten, makes the bridge between the two groups, the IMF technocrats and government officials, for one side, the independent academic economists, for the other. Machlup pressed hard on his team, achieving a detailed report, International Monetary Arrangements: The Problem of Choice, two months before (in June 1964) the Group of Ten and the IMF staff could prepare theirs. He also frankly explained, at the first joint meeting, later that year, the differences between the two approaches. This led to the assignment of Group of Ten chairman, Otmar Emminger, to the Bellagio Group, inaugurating a thirteen-year collaboration. The tasks for the groups were the same, but working methods, and freedom of opinion, made them very different, as well as purposes: Bellagio emphasized disagreements among the proposals, and the nature of their differing impact on the problems dealt with. Friedman, in 1965, criticized the report for not offering one unified  solution for the crisis, but Machlup pointed out that a consensus was achieved on the consequences of each solution proposed by his group: governments and the IMF had food for thought.

Chapter 9, Adjustment Policies and Special Drawing Rights: Joint Meetings of Officials and Academics, is a continuation of this kind of collaboration, now assuming other forms of joint exercises, as the deputies of the Group of Ten start to met regularly with the Bellagio Group, and did so from 1964 to 1977, resulting in the creation of special reserve assets, later called the Special Drawings Rights (due to the French Finance minister, Valery Giscard D’Estaing, insistence on considering them a credit, not an owned reserve). The three Bellagio main economists were the organizers of those meetings, which assumed a kind of a NGO feature. “From 1970 to 1977, discussions would focus on the increasing liberalization of the international capital market and the wisdom of special drawing rights for developing countries” (p. 128). This period also corresponds to the U.S. going off the gold and to the floating of the Deutsche mark: main questions became managed floating and international liquidity. A Basle meeting in 1977 was the last meeting of a Joint Academic and Officials meeting, and the first allocation of SDRs was held in 1970. A new time, no less challenging, had arrived for and within the international monetary system.

Chapter 10, From the Bellagio Group to the Bürgenstock Conferences, explores the continuation of the semi-academic discussions under a new format, this time dealing with floating exchange regimes in various guises, but always under the influence, and the intellectual guidance, of Fritz Machlup, who intended to prepare a well conceived book out of the exercise: this came at light in 1970, as a Princeton University Press publication, Approaches to Greater Exchange Rate Flexibility: The Bürgenstock papers. The analysis takes ground on the Austrian background of Machlup’s thought, which also gave light to planning methods based on Delphi scenarios. A first meeting, with a large number of officials, academic people but also representatives from banks and corporations, was held in Long Island, in January 1969, followed by a second meeting in June, in Bürgenstock, Switzerland, where five more meetings were organized.

Chapter 11, follows the lead, dealing with de facto successor of the Joint Meeting of Officials and Academics, which was an extended Bellagio Group, the Group of Thirty, which included members from all the current G20 financial group. The Group of Thirty meet twice a year at the beginning of the 1980s, and was broader than the Bellagio Group, including industrialists and private bankers, and preferred not to commission papers from academics, establishing instead an agenda for discussion comprising issues of capital movements and less developing countries assets, international banking supervision, and energy (the issue of the moment). But Fritz Machlup was still on the party, with a minor group of academics. A so-called Bellagio Group met again in 1996, under the leadership of the general manager of the Bank for International Settlements, and has been meeting once a year at the Italian resort, under the intellectual guidance of professor Barry Eichengreen, from Berkeley, and always financed by the BIS.

Chapter 12 is dedicated to Reassessing the Bellagio Group’s Impact on International Monetary Reform; Carol Connell affirms that there are “significant parallels between the calls for monetary system reform in the 1960s and those for reform following the financial crisis of 2008-9” (p. 185). This comparison seems off the mark, as the current financial G20 has achieved nothing comparable, besides pressures for the negotiation and implementation of a more stringent set of Basel prudential rules for the banking sector. The outcry about the dollar crisis has been responded by nothing else than the confirmation of its centrality for the current financial and monetary “non-system”. Initial rumors – at its monnaie unique début – about the strength of the euro were replaced by recent fears of its demise.

Notwithstanding this, Connell presents a clear historical synthesis about the importance of the Bellagio Group for the understanding of the most crucial problems of the international monetary system as devised at Bretton Woods: all of the group members came from G-10 countries, the same as the suppliers of the General Arrangements to Borrow (now expanded, and with the New GAB). At least, the academics convinced the central bankers that floating exchange regimes could work, and that flexible currencies could cushion external shocks; that is not a minor intellectual achievement. And, the same problems they tackled, adjustment, liquidity, and confidence, continue to be at the center of the nightmares of the central bankers and finance officials alike (together with new preoccupations, on the fiscal side, as demography imposes its burdens over all). It seems that liquidity is no more an issue today, as governments create real tsunamis of new financial assets, pushing national debts to new higher peaks.

In the bright side, this Chapter 12 finishes with an impressive list of publications of the Princeton Finance Section under Fritz Machlup’s leadership, from 1960 up to 1971, no less than 98 titles authored by many of the most well-known names of the economics trade, and certainly some of Nobel-worth distinction in this profession.

Chapter 13, finally, is a beautiful piece of scholarly work: The Impact of the Bellagio Group on International Trade and Finance Scholarship from the 1960s to the Present, which could also be called something like “the sons and daughters of Machlup, Triffin and Fellner” (and now their grandsons and grand-daughters, like Connell herself). She lists some disciples of the mentors: Edith Penrose, Stephen Hymer, Charles Kindleberger, James Tobin, Andrew Crockett, Edwin Truman, and many others.

Conclusions, at last, summarizes the lessons drawn from each chapter, before returning to the initial hypothesis. Great Depression and World War II influenced how economists thought about policy, inflation, interest rates, deficits and government intervention. Machlup, Triffin and Fellner were the intellectual masters behind much of the conceptual thinking about the great challenges emerging from a world order devised with some improvisation, and no practical guidance, at the end of the II World War. With some Austrian ingenuity and innovative and creative thinking of their own, they are at the core of the adjustments and arrangements that were made, in the Sixties and the Seventies, for the current, certainly limited and incomplete, international monetary system (or non-system, at discretion). One of her hypothesis, that of the centrality of the Bellagio Group for the reform of the international monetary system, is largely confirmed and deserves proper acknowledgment: they have had a real impact on practical policies, and in the reconfiguration of the multilateral financial organizations. And their influence on scholarship and empirical research over a so large community of academic and applied economists is beyond recognition of traditional prizes and honors.

Book review:

  • Carol M. Connell: Reforming the World Monetary System: Fritz Machlup and the Bellagio Group (London: Pickering & Chatto, 2013. xii + 272 pp.; ISBN 978-1-84893-360-6; Financial History series n. 21, $99.00; hardcover)

Paulo R. de Almeida, University Center of Brasilia-Uniceub, and Brazilian Ministry of External Relations (

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