Money Doctors: The Experience of Financial Advising, 1850-2000

Published by EH.NET (September 2004)

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Marc Flandreau, editor, Money Doctors: The Experience of Financial Advising, 1850-2000. New York: Routledge, 2003. xiv + 312 pp. $169.95 (cloth), ISBN: 0-415-32154-9.

Reviewed for EH.NET by Anna J. Schwartz, National Bureau of Economic Research.

Marc Flandreau, Professor of Economics, Institut d’Etudes Politiques de Paris, France, the editor of this volume of ten essays, has contributed an introduction as well the first essay. He organized a conference of which the product is this volume. It explores the historical evolution of the practice of money doctoring. It began with individual bankers and advisers giving way to multilateral agencies. The main themes are the need for international cooperation and the decisive role of the world’s economic and political order in understanding the diversity of experiences of money doctoring. Money doctoring is a political activity that involves economic analysis and has a long-term record.

In the introduction Flandreau quotes from a talk Edwin W. Kemmerer, the money doctor par excellence, gave at the December 1926 American Economic Association meeting on this field of work. What gave the best results, according to Kemmerer, was a government and public receptive to foreign advisers, the extent to which the advice was followed, and the absence of economic fallacies that obstructed the work of foreign advisers. Flandreau comments that the relevance of money doctors currently depends on whether they “can improve the stability of global capitalism.”

The pioneer money doctor, we read, was a French economist, Jean-Gustave Courcelle Seneuil who left political turmoil in France in the 1850s for a fairly tranquil Chile. There, as an opponent of government intervention, he helped draft a free banking law. Money doctors of later years, unlike Courcelle Seneuil, traveled from stable Western European nations and the United States to crisis-ridden nations in Latin America and Eastern and Southern Europe which sought advice on how to solve their financial difficulties. Resolving the crisis involved bitter medicine — budgetary austerity and monetary diet — but a prospective sweetener was an inflow of foreign money, provided the country in crisis undertook the right policies.

Money doctors in effect, Flandreau stresses, were brokers between local authorities and foreign investors, brokering money against reforms. Financial crises in the second half of the nineteenth century thus provided knowledge of how problems arose and insights on how to resolve them. The knowledge and the money resided in countries other than the ones where problems arose. According to Flandreau, this imbalance accounts for the rise of the advice relation. Usually economists gave advice to their home governments, but money doctors traveled abroad.

Flandreau finds a relation between the emergence of American money doctors after 1900 and their success in driving out European ones in several parts of the world and the rise of U.S. financial institutions as global players. He derides Kemmerer’s belief that it was honest, disinterested advice that Americans provided other governments, unsullied by efforts to extend U.S. political power, that accounts for the money doctors’ success. Flandreau argues that because funds and advice were complements politics were inevitably brought into the picture. For him, what clinches this argument is that Kemmerer, despite his genuine desire to help countries, was on the payroll of the New York brokerage firm Dillon, Read and Co.

For Flandreau the exchange of money for reforms is an “implicit contract” to provide borrowers with appropriate incentives, and that modern conditionality, which now describes these contracts, is meant to maximize economic welfare of the debtor by fostering good investment. The welfare function of the creditor, however, has different arguments. The link between both is loose and using international advice to achieve political ends has not been resisted. Politics shapes the remedies that are applied, depending on the specific strategic importance of ailing nations, as illustrated by which nations are chosen for IMF programs.

The essays are arranged in three parts: Part I (The long run: the institutionalization of a practice) includes the chapter by Flandreau. It traces the origins of conditionality before World War I to the relation between borrowing governments and European financiers, and emphasizes an attempt to improve creditors’ monitoring of borrowers. Steven Schuker’s chapter covers the interwar period when traditional money doctors were still practicing, and an international agency, the League of Nations, tried but failed to fill that role because of the absence of coordination and cooperation among the advisers. The chapter by Harold James on post- World War II international lending by the IMF emphasizes its concern to win the cooperation of countries that asked for stabilization assistance by giving them ownership of structural reform programs.

Part II (Case studies: physicians and politicians) covers four country experiences involving political and economic interactions. The study of the Russian default of 1998 by Charles Wyplosz and Nadezhda Ivanova shows that while hyperinflation of the early 1990s was overcome, political and fiscal reforms were delayed. Collapse was inevitable when speculators withdrew support of high-yield Russian government debt. French money doctors’ aid to Romania in the 1920s is the subject of Ken Mour?’s chapter. The Bank of England and the Banque de France each jockeyed for political advantage in this case. Elisabeth Glaser’s chapter on money doctoring in Chile covers episodes when classical economics prevailed (Courcelle-Seneuil 1855-57; Kemmerer monetary reforms 1926-31; the Klein-Sachs exchange rate and fiscal reforms 1955-57; Chicago boys post-1973), punctuated by episodes of inflation (1880-1925; inflows of foreign loans from the U.S. and Britain in 1926-30 were followed by government overspending and default in 1931 on foreign debt — despite a wish to rescue Chile by creditors whose attempt at crisis intervention failed because of rivalry between them — the exchange rate then plummeted and inflation surged; a brief fight against inflation in the mid-1950s ended when budget deficits mounted; vigorous anti-inflation policy from 1973 to 1982 ended hyperinflation.). Roumen Avramov’s chapter on Bulgaria surveys the country’s experience with conditionality from 1900 to 2000. French creditors initially exercised direct control over the economy. That was superseded by League of Nations monitoring. Internal problems, however, were met by state intervention.

Part III (Experts agree: international financial institutions and macroeconomic orthodoxy) begins with Patricia Clavin’s chapter on the League of Nations (1929-40), in which she discusses how its efforts to support reflation were limited by its questionable legitimacy. She finds that international financial institutions operate in a political context that hinders their ability to develop their own research and policy proposals. Eric Helleiner’s chapter on U.S. unorthodox money doctoring post-1945 in Latin America contrasts their Keynesian expansionary advice with the orthodox recommendations of French and British experts in the nations where they were influential. Louis Pauly’s chapter on structural conditionality in the Bretton Woods institutions focuses on the role of the U.S., whose decisions on which countries to fund are decisive. He finds that the U.S. has shaped conditionality to a greater extent than have the problems in the recipient countries.

Here are my reactions to this collaborative research effort. The archival research that underlies many of the chapters is truly impressive. The volume’s theme — that policy failure can be explained by lack of international cooperation — has become a popular mantra of economic historians. That emphasis, however, often obscures difficult underlying internal and external problems, such as undiversified economies dependent on a single export commodity, or misaligned exchange rates, or real interest rate differences among countries that international cooperation cannot cure. With respect to the theme that money doctoring has a political dimension, it is undoubtedly the case of multilateral institutions’ activities, but there clearly are exceptions when considering individual money doctors, such as Courcelle Seneuil, and probably Kemmerer, despite Flandreau’s animadversions.

The epigraph is a quotation from Moby Dick by Herman Melville:

It’s a mutual joint-stock world, in all meridians. We cannibals must help out those Christians.

The authors apparently regard the creditors in Western Europe and the U.S. as the cannibals and the debtors in Latin America and Eastern and Southern Europe as the Christians.

Anna Schwartz (with Owen Humpage and Michael Bordo) is writing a monograph on the history of U.S. official exchange market intervention.