Treasure Islands - Nicholas Shaxson [35]
Keynes had hoped that the IMF would become a depoliticized institution, overseeing automatic mechanisms to resolve global financing imbalances automatically and remove politics—and raw American power—from the equation as far as possible. He did not get his wishes, and when these matters were decided at a subsequent meeting in 1946, Keynes said acidly that he hoped “there is no malicious fairy, no Carabosse”—a reference to the wicked fairy-tale godmother figure of Sleeping Beauty, popularized in Tchaikovsky’s and later Diaghilev’s ballet—“whom he has overlooked and forgotten to ask to the party.” Fred Vinson, a top U.S. negotiator, who felt he was the target of the remark, was heard to say in response, “I don’t mind being called malicious—but I do mind being called a fairy.”15
Many people today see the IMF and World Bank—the children of the Bretton Woods Conference—as the handmaidens of globalization, of unfettered trade and capital flows, and the instruments of Wall Street bankers. This was not the original idea. Keynes did want open trade, but finance was to remain tightly regulated: otherwise, surges of flighty capital would generate recurrent crises that would hamper growth, disrupt and discredit trade, and possibly drive fragile European economies into the arms of the communists.
Keynes understood the basic tension between democracy and free capital movements. In a world of free capital flows, if you try to lower interest rates, say, to boost struggling local industries, capital is likely to drain out overseas in search of higher returns, thwarting your original intent.16 Investors hold a kind of veto power over national governments, and the real lives of millions of people will be determined not by their elected representatives but by what the Indian economist Prabhat Patnaik called “a bunch of speculators.” Freedom for financial capital means less freedom for countries to set their own economic policies: from financial freedoms a form of bondage emerges.
Keynes’s answer was simple and powerful: control and constrain the flows of capital across borders and limit the trade in currencies through exchange controls. He believed that financing was usually best when it happens inside, rather than between, countries. Capital controls would give governments more room to pursue objectives like maintaining full employment: Instead of limiting the scope of democracy in the interests of speculators and financiers, the plan was to limit the international mobility of capital: Finance would be society’s servant, not its master. “Let goods be homespun whenever it is reasonably and conveniently possible,” he wrote. “Above all, let finance be primarily national.” The Bretton Woods plan, for all its faults, was designed to tame the forces of international finance.17
Capital controls can be hard to imagine for those who have not experienced them. To get foreign exchange for overseas trips, for example, you needed official permission. Frequent international travelers, for instance, would have a section in their passports, “Foreign Exchange Facilities—Private Travel,” that would be filled with official stamps and signatures authorizing access to sums of foreign exchange. Companies had to get permission to shift money across borders.
This short history helps us to see how very far indeed we have now traveled from the system created by Keynes and his American counterpart Harry Dexter White. Dismantling capital controls is one thing. But we have taken a full step again beyond that, to a world where capital is not only free to flow across borders but is actively and artificially encouraged to flow, lured by the offshore attractions of secrecy, evasion of prudential banking regulations, tax evasion and avoidance, and more. Once again, Keynes would have been horrified.
There is something else about this episode that is rather less well known.
Many mainstream economists embrace a simple idea that goes something