Most important of all, floating rates would enable us to separate issues and determine our national policies on the right grounds. Monetary and fiscal policy could be directed toward pursuing internal stability without being hamstrung by the. balance of payments. We could decide how much foreign aid to give in terms of our resources and our values, not by the irrelevant consideration of the currency in which it is expressed. We could instruct the military to buy in the cheapest market and keep the real costs to a minimum—not turn them into a foreign exchange authority. We could conduct foreign policy in terms of our true national interests—not in terms of the effect on gold flows. We could behave in foreign trade like a great nation, not like a mendicant, by unilaterally moving toward freer trade without having to be concerned about balance-of-payments problems.
This last point perhaps deserves a slight digression. Not the least of the advantages of floating rates, in my opinion, is that it makes it so much easier for the layman to understand the merits of free trade. With rigid rates, the first effect of a reduction in tariffs is an increase in imports without any immediate effect on exports. It looks as if imports have simply displaced domestic products and so produced unemployment. It takes a subtle chain of reasoning to show that this is only part of the story, that the increase in imports will have indirect effects that will ultimately lead to an expansion of exports so that the final result is an increase in foreign trade not an increase in unemployment. And, indeed, with our present nearly paralyzed adjustment mechanism, the indirect effects may be long delayed and highly unreliable.With floating rates, a reduction in tariffs will also produce an attempted increase in imports. But how can this be realized? Only if the importers can get some foreign exchange. To do so they will bid up its price which immediately makes exports more attractive to foreigners. The first effect of a reduction in tariffs is thus a rise in the price of foreign exchange and a simultaneous increase in imports and exports. There is not even a temporary importation of unemployment.--Milton Friedman (1967), "First Lecture" in The Balance of Payments: Free versus Fixed Exchange Rates, American Enterprise Institute, 17-18
The passage above caught my attention for a number of reasons. First, the slight digression shows Friedman's sense that, in a democracy, public policy relies on public opinion. And he assumes that perceptions of policy X (free floating exchange rates) can influence perceptions of policy Y (free trade). (A further assumption is the Humean one that people are more easily swayed by direct perception than long or subtle chain of reasoning.) And that he sees clearly the linkages among distinct policy aims. Public support of X can lead to public support of Y. We see Friedman here showing his policy-sensitive skill of playing chess on multiple connected boards. To be sure, Friedman's support of X is not merely instrumental. Most of the lecture offers distinct arguments for it.
Second, Friedman's argument in the first quoted paragraph is very much couched in terms of national greatness and national interest. (It is not obvious these always point in the same direction, but for great powers they do.) This is very much a realist rhetoric meant to appeal to the national statesman. Friedman is far removed from the attacks on nationalism one can find, say, in neoliberals like Mises.
To be sure, Friedman is also committed to the idea that gains from trade and free floating exchange rates are mutual. So, he is not advocating polices that necessarily make other states poorer. But he is advocating removing a clear constraint -- concern over balance of payments -- on American freedom to maneuver in foreign affairs and so be able to pursue its national interests.
This matters also for the critics of neoliberalism. In her perceptive review of Melinda Cooper's Family Values (a book I have recently praised here (see also here)), Sarah Brouillette notes that the age of the Fordist family wage to which many critics of neoliberalism seem to pine "was also hugely resource extractive and suburbanizing. The capacity to redistribute wealth more evenly in the US was, in addition, contingent upon broader economic transformation that required dispossessions, expulsions, enclosures, primitive accumulations, US hegemony propped up by global wars, and the origins of the whole phenomenon of US industrial triumph after WWII in wartime accumulation and relative devastation across Europe."+
The question is to what degree US Hegemony was the cause of the capacity to redistribute wealth more evenly in the US or an effect of such domestic Fordist/racialized egalitarianism or both were the effect of economic might. Brouillette assumes that "the accumulation of wealth requires these devastations." But that's to say not jus the marxists were right (exploitation is endemic to capitalism), but the mercantilists were right all along. There is no possibility of mutual gain. Here I do not intend to resolve this. Just register my skepticism.
Rather, Brouillette is right to note that behind the debates over the ways in which neoliberals displaced the efforts to extend the Fordist family wage to other groups, is a wider debate over foreign policy. Or to be precise, Friedman saw that getting domestic policy right was also a means to American hegemony. Any reckoning of neoliberalism, its virtues and vices, must (recall) confront its role in facilitating empire.
*Cooper herself prefers a slightly later and briefer age -- associated with counterculture of the 1960s -- when the benefits of Fordism were extended both to single mothers and accross racial line. While Brouillette admires much in Cooper, she treats this nostalgia forstate provision."
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