ABSTRACT
Figure 35.1 The financial limitations of the IDA in the long term 560 Figure 35.2 IMF surveillance in the Netherlands 1990-1 562
From Keynes to Hayek and Friedman
The international monetary policy of the US remained largely unpredictable despite the formation of the G7 in 1975 (see §27.3). However, at the G7 summits in the late 1970s President Jimmy Carter defended a policy of multilateral cooperation between the US, Western Europe and Japan, referred to as trilaterism. He expected that, given their balance of payments surpluses, Western Europe and Japan would pursue an expansionist policy to boost economic growth, the so-called ‘locomotive function’. Carter proved to be the first postwar president who was prepared to subordinate domestic economic policy to international monetary considerations. At the end of 1978 he followed a restrictive monetary policy to bring high inflation and interest rates under control. He reserved money to be able to intervene actively in the currency market and liberalized the sale of American gold (Spero 1985, 71). Until the mid-1980s, the G7 summit in Bonn in 1978 was the only meeting where real agreements were made, when it was
decided that Germany would increase government spending and the US would take anti-inflation measures. According to monetarist economists, however, this high inflation was fanned by the Keynesian policy pursued up to this point, because this would have overstimulated spending. When Ronald Reagan became president in 1981 the monetarist economic school gained the upper hand over Keynes and Galbraith, while in the UK Prime Minister Margaret Thatcher strongly believed in the ideas of the Austrian economist Friedrich von Hayek, who wanted to restrict the role of the state to maintaining the rule of law and defended a return to classical free-market capitalism. Hayek thus contributed to a paradigmatic shift away from the dominant interventionist Keynesian policies. According to the American economist Milton Friedman the increased government influence on the economy was an obstacle to economic development. Like Hayek he argued that the role of government should be subordinate to that of the market (‘less government, more market’) and that the growth in money supply should be curbed by restricting credit. The government needed to follow a monetary policy of manipulating the available amounts of money to further the optimal working of the market.
