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A Tale of Two Central Bankers: Eccles, Prebisch and Financial Reform Matías Vernengo.

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Presentation on theme: "A Tale of Two Central Bankers: Eccles, Prebisch and Financial Reform Matías Vernengo."— Presentation transcript:

1 A Tale of Two Central Bankers: Eccles, Prebisch and Financial Reform Matías Vernengo

2 Plan of the Talk The Depression led to a need to rethink the principles of Central Banking; In the Center central bankers dismissed the so-called real bills doctrine, and developed an activist view of the central bank; In the periphery central banks changed to try to insulate the worst effects of balance of payments crises; Eccles and Prebisch are paradigmatic examples of those tendencies; Central banks were designed to stimulate, directly or indirectly, demand, and to maintain full employment. Class conflict and external shocks were seen as central for demand management.

3 Capital Mobility and Default

4 Terms of Trade

5 Central Bank Reform Real Bills Doctrine suggests that the Central Bank passively provides liquidity to the system. It is generally presumed that in the 1930s a more activist position (leaning against the wind) was developed; The collapse of the Gold Standard gave an additional degree of freedom to central bankers (exchange rate policy); Before Keynesian policies became popular, the role of demand policies was central for recovery; Contested terrain view of monetary policy in the center, and the importance of the external constraint in the periphery.

6 Marriner S. Eccles (1890-1977) Inefficiency of monetary policy (pushing on a string); Monetary policy centered on the role of the Fed as fiscal agent of the government, maintaining a 2.5 percent interest on government bonds, and increasing the amount of bonds held by the banking sector; Eccles’ program consisted of increasing transfers to states, increase federal government spending, implement a program to control production and raise agricultural prices, refinance mortgages on a long term basis at low rates of interest, and bring about a permanent settlement of inter-allied debts by promoting cancellation of debts.

7 Raúl Prebisch (1901-1986) The other Prebisch (conservative or pragmatic?); Prebisch saw monetary policy as an instrument to manage the cycle, that was in the case of the periphery imposed by external shocks; Further, he saw the secular deterioration of export prices as the central problem for developing countries, and the infeasibility of generating employment by exporting commodities; Advantages of abandoning the ‘intermittent Gold Standard.’

8 Conclusion Eccles considered the role of the Federal Reserve as fiscal agent of the Treasury as the essential one, in a situation that only expansionary fiscal policy could turn the economy around; Prebisch considered that an independent central bank could minimize the effects of external crises in smooth out the cycle, in particular, by allowing a more depreciated currency and the abandonment of the Gold Standard; Both Eccles and Prebisch did NOT consider that the central role of the central bank was to control inflation, even though they remained concerned about inflation.

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