Brazil currency devaluation essay

Good Money Drives out Bad?

Brazil currency devaluation essay

I observe from the tie which Dr. Flinchbaugh wears, and from several other things around here, that if I am going to be in Kansas State tradition, I must speak purple prose. I shall try to do so without offending you. There's a standard cliche, which I am sure you have all heard, that if you have two economists in one room you are bound to have at least three opinions.

The subject I am going to talk about today, however, is one subject with respect to which that is not true. With respect to the area of international trade, with respect to the question whether it is desirable for a country to have free trade or to have tariffs and other restrictions on imports and exports, in that particular area economists have spoken Brazil currency devaluation essay almost one voice for some two-hundred years.

Ever since the father of modern economics, Adam Smith, published his great book, The Wealth of Nations, inthe same year in which the Declaration of Independence was issued in this country; ever since then the economics profession has been almost unanimous on the subject of the desirability of free trade.

Of course, complete unanimity is hardly ever possible, and every once in a while there have been some deviations from the straight and narrow path. Almost always those deviations have reflected not a disagreement with the fundamental message of Adam Smith, not a disagreement that in the good world free trade would be the best of all possible courses, but they have tended to reflect special circumstances of the time.

Perhaps the most famous such deviation was by the most noted and some would say notorious of modern economists, John Maynard Keynes, the English economist who gave his name to the Keynesian Revolution. In in the course of the depression, John Maynard Keynes, who had been a free trader all his life, came out in some articles in Britain in favor of departing from free trade and of introducing tariffs.

He did so not because he thought that was in and of itself the best policy, but because he thought that the best policy was politically infeasible. In his view, the right policy for Britain at that time was to go off the gold standard, end a fixed exchange rate, allow the pound sterling to be a free market currency whose price would be determined in the market, as it now is, of course, in a world of floating exchange rates today.

But Keynes, an economist, made the political judgment that it was not politically feasible for Britain to go off the gold standard. Tariffs can be an alternative to devaluation. If on the one hand the price of the pound sterling was changed from the four dollars and eighty some cents, which then was its price, to let's say four dollars, that would make British goods cheaper to foreigners; it would make foreign goods more expensive to British residents.

In that way, it would redress the problem of the balance of payments they were facing. That's one way to do it and the best way. But Keynes thought that was politically infeasible and it comes to the same thing, to introduce a tariff on imports and a subsidy to exports. That's an indirect and concealed form of devaluation.

Brazil currency devaluation essay

And so Keynes came out for that concealed form. His political judgment was like that of many economists, flawed. About three weeks after he came out for a tariff on these grounds, Britain went off the gold standard.

I may say that this is not an isolated story. Time and again, economists, in my opinion, have erred when they have proposed second best solutions in the area where they are experts, namely economics, because of predictions they make about political feasibility in an area where they are not experts.

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At any rate, Keynes had a very flexible mind and one week after Britain went off the gold standard he retracted his support for tariffs. He published an article saying, now that we have gone off the gold standard, there's no longer any point to tariffs; I return to my free trade principles.

Brazil currency devaluation essay

Later when he reprinted that retraction in a book of essays, he appended a footnote, which is a very revealing footnote because it shows how much damage can be done by the tendency for people to preach second best solutions.

He said in his footnote, "Not all my free trade friends proved to be as prejudiced as I had thought, for after a tariff was no longer necessary, many of them were found voting for it.

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It's often argued that the reason we have bad economic policy is because the experts disagree; that, if only the experts would agree, if only all economists were of the same mind, we would have an excellent and fine economic policy.

The case of free trade and the tariff is a clear counter example. Here is one case where economists have all agreed, or essentially so. As I say, you have the very minor deviations like Keynes, but very few others. Yet, except for the case of Great Britain from the repeal of the Corn Laws in to the First World War when, for nearly a century, Britain had complete free trade with no tariffs whatsoever on anything, tariffs have been widespread.

The United States had tariffs throughout the nineteenth century. One of these measures, the infamous Smoot-Hawley Tariff Bill of which raised tariffs sharply, has been given some of the responsibility for the subsequent difficulties in the United States and the world.

Today, we have a widespread move for protection: We have a growing pressure for quotas on imports of oil and of other products. We have widespread concern that somehow or other a weakening dollar, the decline in the price of the dollar in terms of the mark or in terms of the Swiss franc or the yen, that a weakening dollar in that respect, requires the government to impose restrictions on imports or to subsidize exports.

The interesting question, and the question I want to explore with you today, is why is it that interference with international trade has been so widespread, despite the almost uniform condemnation of such measures by economists? Why is it that you have the professional agreement on the one side, and observe practice on the other which departs so sharply from that agreement?

The political reason is fairly straightforward. The political reason is that the interests that press for protection are concentrated. The people who are harmed by protection are spread and diffused.

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Indeed the very language shows the political pressure.Currency Devaluation in Pakistan- Causes, Impacts and Suggestions Starting from the currency, it is a unit of exchange, which is in the form of money and allows you to facilitate the transfers of goods and services.

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