I apologize for the sparse posting. That probably won't change before March of 2011, when I’ll have a manuscript ready for The Empire Trap and have teaching notes done for all my cases. Plus, the World Cup! (You don’t follow my Facebook page?)
But let’s take Scott’s half-joking question: Why didn’t the Phillipine Republic’s amazing access to the U.S. market trigger a sustained export boom? Simple: the fixed exchange rate mandated by the Philippine Trade Act.
The Bell Trade Act fixed the parity of the Philippine peso at 50¢, the same as the prewar parity. That was ... how to put this? That was insane. Price levels jumped six times after the war. Nominal wages followed, but with a lag. After the war, the economy went through a brutal deflation ... which neither reduced nominal wages nor brought the real exchange rate back into line. It was economic insanity. The eurozone follies are nothing in comparison. Harry Dexter White testified before Congress about how insane it was, albeit in an understated way. “The very essence of sovereign monetary systems is that they may get out of line with each other. If you protect the loss against exchange by fixing that rate of exchange so that it cannot be altered, you may be subjecting the country to economic conditions which would be bad for the whole country.”
Had the Commonwealth of the Philippines received the status of Puerto Rico (better yet, Hawaii) its people would have emigrated en masse and it would have received far more reconstruction money. Had the United States really cared about the new Republic of the Philippines, it would have offered a perpetual customs union in return for giving U.S. investors equal treatment with Filipino ones and allowed the peso to be devalued to 20¢ before re-establishing parity. (Or better yet, a devaluation followed by dollarization.)
Neither happened. Representative Wilber Mills (D-AK) let the cat of the bag as to why. “We are attempting in the language there to safeguard the value of capital that may go from the United States to the Philippines.” That is not crazy. Devaluation would reduce the value of U.S. investments. But why not give the Philippines a head start by bringing the exchange rate into line with relative prices? Ah. Well. The Philippine Trade Act allowed the President of the United States to “establish the total amount of Philippine articles which may ... be entered or withdrawn from warehouse in the United States” whenever he find “that they are coming or likely to come into substantial competition with like articles that are the product of the United States.” Now that provision in itself did not handicap the Philippines, but a Congress that would insist on that provision was not a Congress that would allow the Philippines to adopt the trade policies that Japan, Germany, and South Korea would later adopt ... and which China (at a much larger and more damaging scale) is adopting today.
At this point, the story is pretty much done. Still, there is an important wrinkle, which is below the fold.