Table Of ContentExchange Rate Alignments
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Exchange Rate Alignments
John Mills
Economist, John Mills Ltd
© John Mills 2012
Softcover reprint of the hardcover 1st edition 2012 978-1-137-02296-7
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First published 2012 by
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10 9 8 7 6 5 4 3 2 1
21 20 19 18 17 16 15 14 13 12
Contents
List of Illustrations vii
Preface ix
Acknowledgements xi
1 Economic Growth 1
Competitiveness 4
Facing international competition 8
Investment and productivity 14
Returns on investment 16
2 The Exchange Rate 2 0
Changing the exchange rate 2 2
Preferences for strong currencies 2 7
Protectionism vs globalisation 34
The costs of overvaluation 37
3 Inflation 40
Devaluation and the price level 45
Leading sector inflation 5 0
Shocks to the system 5 3
Excess demand 5 7
Labour costs 6 0
4 Unemployment 6 6
Comparative experience 68
Misguided solutions 7 2
Productivity and competitiveness 7 6
5 Sustainability 8 2
Population growth 84
Resources 8 9
Climate change 93
Migration 9 7
6 The Industrial Revolution 1 01
Pre-industrial history 1 02
Early industrialisation in Europe 1 08
v
vi Contents
Nineteenth-Century Europe 110
The US economy to World War I 116
Lessons from the gold standard era 121
7 International Turmoil: 1914–45 1 24
Europe’s disastrous years 1 26
Boom and slump in the USA 1 33
Keynes and demand management 136
8 Post-World War II 1 41
European recovery and the Common Market 1 44
US experience post-World War II 1 48
Mixed fortunes in Japan 1 53
The USSR and the command economies 1 58
The Third World 161
9 The Monetarist Era 166
Monetarist theory and practice 1 70
Slow growth in Europe 1 76
Monetarist policies in the USA 182
The tiger economies 186
10 Twenty-First-Century Perspectives 191
Trade imbalances 1 93
Fiscal crises 198
Europe’s single currency 200
US and UK travails 2 05
11 Policies for the Future 2 08
Unsustainable trends 209
How much devaluation? 214
Wider perspectives 219
Negotiations 2 22
The cost of inaction 227
Notes 231
Bibliography 244
Index 251
Illustrations
Tables
1.1 Comparison between the percentage growth rate
per annum of Industrialised Countries and the
Rest of the World between 1950 and 2010 4
1.2 Options available to companies producing
internationally tradeable goods in economies
with parities at varying levels 10
1.3 Changes in output per head of the US working
population between 1977 and 1997 15
2.1 Ratio change in share of world trade, growth in
GDP per head and percentage of the economy
devoted to manufacturing selected economies 3 3
3.1 Exchange rate changes, consumer prices, the real
wage, GDP, industrial output and unemployment 4 3
3.2 Growth and inflation rates in ten OECD countries
between 1953 and 1969 5 1
3.3 Economic growth and inflation rates in selected
countries between 1973 and 1978,
and 1978 and 1983 56
3.4 U nemployment and inflation in ten OECD countries
at selected periods between 1963 and 1993 6 2
4.1 EU and US unemployment labour force changes ratio 7 1
8.1 G rowth in the original member countries of the
Common Market for the fifteen years spanning
its establishment in 1958 1 46
9.1 Growth in the EEC during the snake and exchange
rate mechanism periods 1 81
9.2 Growth statistics for the tiger economies 187
10.1 Current account balances – selected countries, 2010 1 95
10.2 Figures showing government and consumer debt
trends in the USA and UK 1 96
vii
viii List of Illustrations
11.1 The elasticity of demand for exports and imports
of sixteen industrial and eight developing countries 2 15
11.2 Elasticity of demand for exports and imports,
2001–2004 2 16
11.3 Sources of growth in the world economy: GDP
per head – now and perhaps in the future 223
Figure
5.1 Total fertility rate plotted against GDP per capita 88
Preface
This book is not about doom and gloom. Its tone, very specifically, is
quite the opposite. Its message is that the austerity, unemployment, cuts
in public expenditure, slow growth and decline vis-à-vis most of the
rest of the world which nearly everyone in Britain assumes are in store
for us – indeed, for many other Western countries, too – are unneces-
sary and avoidable. None of these poor outcomes is inevitable. On the
contrary, the dismal economic prospects we currently face are largely,
if not entirely, the result of bad policies which could easily have been
different and which it would not be particularly difficult to change quite
quickly for the better. The object of this book is to explain what these
mistaken policies are and what needs to be done to put them right.
To show what has gone wrong and what needs to change, the text
which follows is essentially in three parts. The first five chapters explain
what causes and hinders economic growth, explore the crucial role of
exchange rates, review what we should and should not do about infla-
tion, determine what can be done to bring back full employment and
consider all these issues in the light of the need for sustainability. None
of this is particularly complicated, and there is no reason why it should
be. I agree with Professor J. K. Galbraith when he says that he had ‘long
felt that there is no economic proposition that can’t be stated in clear
accessible language.’ 1
The next five chapters are about economic history. Their role is first
to provide a test bed to see whether the previous chapters’ explana-
tions of how economies work can explain adequately and convincingly
why economic history has unfolded in the way it has and second to
do so by addressing some important questions to which there are no
very obvious answers. Why have some economies grown much faster
than others? Why has the UK – dropped from having the highest living
standards in the world to now appearing way down the league table?
Why is it that so high a proportion of the world’s manufactured goods
are made in China? Why is unemployment an intractable problem in
most of the West, whereas for most of the 1950s and 1960s only a tiny
fraction – about 2 per cent – of the potential labour force, at least in
Europe, was then out of work? Why did inflation suddenly become a
major problem in the 1970s, and were sensible policies adopted to get it
ix
