Postwar Floating Exchange Rate Standard

kernals12

Banned
What if, instead of the Bretton Woods fixed exchange rate system, countries just floated their currencies after World War 2? IOTL Fixed exchange rates led to many absurdities such as Britain being forced to restrict imports at a time when they were desperate for raw materials to rebuild from the war. I think the world would've been a lot better off if currencies were free to float starting in the 1940s rather than the 1970s.
 
The rest of the world especially Europe and Japan was in ruins and in order to build in again, they had to peg their currencies to the anchor currency which was the US Dollar and by pegging their currency to US Dollar, they can accumulate necessary reserves from export revenues for reconstruction. Floating the currency was unlikely after WWII.
 

kernals12

Banned
The rest of the world especially Europe and Japan was in ruins and in order to build in again, they had to peg their currencies to the anchor currency which was the US Dollar and by pegging their currency to US Dollar, they can accumulate necessary reserves from export revenues for reconstruction. Floating the currency was unlikely after WWII.
With floating currencies, reserves cease to be a problem.
 

kernals12

Banned
This was seriously considered by the UK in the early 1950s https://en.wikipedia.org/wiki/Operation_ROBOT. It might have worked well, but the monetary policy of the 1970s when floating rates were first introduced was a disaster, even without the oil shocks.
I just read the wikipedia article, it's bizarre that they thought this inflationary policy would raise unemployment. And I can't believe its advocates didn't tout the benefits of putting an end to balance of payments crises and rationing.
 
Lord Cherwell was of course narrowly correct in that it would have forced modernisation and rationalisation in British industry which would have caused unemployment to rise. This proved to be the case when floating rates were adopted twenty years on. However it could be argued that this would have been much better done at a time when British industry was competitive than (as OTL) when it was no longer competitive.
Moreover the issue of whether the economy would grow more strongly and ultimately offset the increased unemployment was not strongly considered.
Serious implications for Suez -the Americans couldn't have applied pressure to the same degree and probably no oil shocks though a more gradual upward increase in oil prices. Britain and France still significant regional powers in the Middle East and Nasserism somewhat discredited.
Even more serious implications for the British economy and probably no need for Thatcherism. No radical reform necessary if situation was gradually resolving itself over the previous twenty years.
Mind you, a lot of the virulent anti-Thatcherism Britain witnessed was actually projection of resentment of social and economic change generated by the rise of automation, mobile communications technology and personal computing. And the collapse of the Marxist model of the economy (on the left) and of traditional social cohesion (on the centre-left and on the right). So politics could have had a sharper edge and less consensus in the 1960s and 1970s than they did OTL if some of these trends started manifesting sooner.
 
I just read the wikipedia article, it's bizarre that they thought this inflationary policy would raise unemployment. And I can't believe its advocates didn't tout the benefits of putting an end to balance of payments crises and rationing.
You've got to remember that they were operating in an old Keynesian paradigm where they focused on controlling quantities not prices, and the belief was that export elasticities were low, meaning there was little to gain from devaluation. The most charitable interpretation using modern economics is that leaving a fixed exchange rate regime raises inflation expectations (why leave the fixed rate unless you're going to inflate) and this meant that to prevent inflation rising too far would require a more deflationary policy than if inflation expectations were lower.

Personally, having read most of the secondary sources, I think the driving argument was political, the treasury was in favour of the plan but the public would have been seen it as a failure, and it would have resulted in lower living standards (higher import prices) in the short term. Worth remembering that the Tories won only a slim majority in 1951 on fewer votes than Labour had got, and they had promised to keep many Labour reforms. There was the danger it would have lead to an "unnecessary" electoral defeat for the Tories in the same way protectionism did in 1906 and 1923.

It's an interesting what if though.
 

kernals12

Banned
You've got to remember that they were operating in an old Keynesian paradigm where they focused on controlling quantities not prices, and the belief was that export elasticities were low, meaning there was little to gain from devaluation. The most charitable interpretation using modern economics is that leaving a fixed exchange rate regime raises inflation expectations (why leave the fixed rate unless you're going to inflate) and this meant that to prevent inflation rising too far would require a more deflationary policy than if inflation expectations were lower.

Personally, having read most of the secondary sources, I think the driving argument was political, the treasury was in favour of the plan but the public would have been seen it as a failure, and it would have resulted in lower living standards (higher import prices) in the short term. Worth remembering that the Tories won only a slim majority in 1951 on fewer votes than Labour had got, and they had promised to keep many Labour reforms. There was the danger it would have lead to an "unnecessary" electoral defeat for the Tories in the same way protectionism did in 1906 and 1923.

It's an interesting what if though.
Floating exchange rates would've enabled an end to rationing, would that not have been popular?
 
Floating exchange rates would've enabled an end to rationing, would that not have been popular?
Rationing ended in 1954, ie before the next election, even without a floating exchange rate. I am definitely not arguing that the government got the decision right, simply explaining possible reasons why they made the decision they did.
 

kernals12

Banned
Rationing ended in 1954, ie before the next election, even without a floating exchange rate. I am definitely not arguing that the government got the decision right, simply explaining possible reasons why they made the decision they did.
But the balance of payments problem would haunt Britain for the next 20 years and force other stupid policies such as the Selective Employment Tax.
 
But the balance of payments problem would haunt Britain for the next 20 years and force other stupid policies such as the Selective Employment Tax.
True, but that wasn't in the post I was replying to. To repeat myself, I'm not defending the decision, simply explaining some of the reasons it might have gone the way it did, after all they must have had them, this doesn't mean the reasons were adequate. Presumably they weren't expecting continual balance of payment problems (again, not saying they shouldn't have). Hindsight is a wonderful thing, but they were hardly the first or last government to do this, just look at the ERM, 30-40 years later with even less chance of success due to the relaxation of capital controls.
 
Top