Finance & Development, September 1971: 8

---

European Monetary Unification for Balanced Growth: Towards New Monetary Relationships. Currency Devaluation in Developing Countries. The Dollar and the Policy Mix: Experience with Canada's Floating Rate. Katz, and William H. How to Divest in Latin America, and Why. Private and Official International Money: The Case for the Dollar.

Toward Limited Exchange-Rate Flexibility. Behind the Veil of International Money. Conditions of Equilibrium and the Price of Gold. Foreign Aid--A Critique and a Proposal. Deficits Benign and Malignant. Gold and the International Monetary System: Changing the United States Commitment to Gold.

Optimum Adjustment Processes and Currency Areas. Barbarous Relic or Useful Instrument? New Proposals for the International Finance of Development. Toward Assessing the Need for International Reserves. United States Gold Policy: The Case for Change. Reserves, Reserve Currencies, and Vehicle Currencies: Problems of the International Monetary System. Requirements of an International Reserve System. The Role and the Rule of Gold: Monetary Policy in an Open Economy: Its Objectives, Instruments, Limitations, and Dilemmas.

Recent Trends in International Monetary Policies. Current Issues in Commodity Policy.

Sterling, Speculation and European Convertibility: Its Present Role and Future Prospects. Gold in World Monetary Affairs Today. The International Bank for Reconstruction and Development.

The International Status of the Dollar. Two Approaches to the Exchange-Rate Problem: The United Kingdom and Canada.

The Belgium-Luxembourg Economic Union, Lessons from an Early Experiment. United States Merchant Marine Policies: The Bank for International Settlements, Agricultural Price Policy and International Trade. The Emerging Pattern of International Payments. Problems of the Sterling Area: With Special Reference to Australia. Dollar Shortage and Oil Surplus in The Cause and Cure of Dollar Shortage.

Some European Currency and Exchange Experiences: The British Balance-of-Payments Problem. Bilateralism and the Future of International Trade. Conditions of International Monetary Equilibrium. International Aspects of Wartime Monetary Experience. Fundamentals of International Monetary Policy. The Keynes and White Proposals. The Microstructure of the Foreign-Exchange Market: A Selective Survey of the Literature.

Trade Elasticities for the G-7 Countries. Interpreting the ERM Crisis: Country-Specific and Systemic Issues. Foreign Direct Investment and Capital Flight. The Macroeconomics of European Agriculture. One Money or Many? The German Buybacks, A Cure for Overhang? Should the Maastricht Treaty Be Saved? External Debt, Adjustment, and Burden Sharing: Economic Summit Declarations, Examining the Written Record of International Cooperation.

Economic Reform in the Soviet Union: Pas de Deux between Disintegration and Macroeconomic Destabilization. Can Swaps Solve the Debt Crisis? Lessons from the Chilean Experience. The Emergence and Persistence of the U. Obstacles to International Macroeconomic Policy Coordination. Devaluation, External Balance, and Macroeconomic Performance: A Look at the Numbers. American "Reparations" to Germany, Implications for the Third-World Debt Crisis. Estimates, Issues, and Explanations.

The Current-Account Balance and the Dollar: Real-Exchange-Rate Variability from to and to Rules for Regulating Intervention under a Managed Float. Theoretical Issues in International Borrowing. Reserve-Currency Diversification and the Substitution Account. Toward an Explanation of National Price Levels.

Intervention in the Exchange Market for DM, Exchange-Rate Management in Theory and Practice. Flexible Exchange Rates in Historical Perspective. Sterling and the Tariff, The Operations of the Exchange Equalisation Account, London, Washington, and the Management of the Franc, Currency Risks in International Finance Markets. The Monetary Approach to the Balance of Payments: Exchange-Rate Stabilization in the Mids: Negotiating the Tripartite Agreement.

Capital Mobility and Financial Integration: Organization and Administration of a Monetary Union. A Factor in Export Demand for Manufactures. The Formation of Financial Centers: A Study in Comparative Economic History. The Reconstruction of the International Monetary System: The Attempts of and The Cost of Tying Aid: A Method and Some Colombian Estimates. The Demand for International Reserves. An Exploratory Empirical Study. Key Currencies and Gold, Living Law and Emerging Practice.

Patterns of Fluctuation in International Investment Before Test of A Theory. International and Interregional Payments Adjustment: Adjustment Costs and the Distribution of New Reserves. The External Liquidity of an Advanced Country. The Management of the Dollar in International Finance. The Evolution of the International Monetary System: Historical Reappraisal and Future Perspectives.

An Annotated Chronicle, Postwar Bilateral Payments Agreements. Multiple Exchange Rates and Economic Development. Monetary and Foreign Exchange Policy in Italy. A Perspective on Recent Theoretical Developments. The Effectiveness of Central-Bank Intervention: A Survey of the Literature After International Trade Policy with Imperfect Competition. Monopolistic Competition in Trade Theory.

A Survey of Issues and Early Analysis. Two world wars had destroyed the country's principal industries that paid for the importation of half of the nation's food and nearly all its raw materials except coal. The British had no choice but to ask for aid. For nearly two centuries, French and U. But in de Gaulle—the leading voice of French nationalism—was forced to grudgingly ask the U.

Free trade relied on the free convertibility of currencies. Negotiators at the Bretton Woods conference, fresh from what they perceived as a disastrous experience with floating rates in the s, concluded that major monetary fluctuations could stall the free flow of trade. The new economic system required an accepted vehicle for investment, trade, and payments.

Unlike national economies, however, the international economy lacks a central government that can issue currency and manage its use. In the past this problem had been solved through the gold standard , but the architects of Bretton Woods did not consider this option feasible for the postwar political economy. Instead, they set up a system of fixed exchange rates managed by a series of newly created international institutions using the U. In the 19th and early 20th centuries gold played a key role in international monetary transactions.

The gold standard was used to back currencies; the international value of currency was determined by its fixed relationship to gold; gold was used to settle international accounts. The gold standard maintained fixed exchange rates that were seen as desirable because they reduced the risk when trading with other countries. Imbalances in international trade were theoretically rectified automatically by the gold standard.

A country with a deficit would have depleted gold reserves and would thus have to reduce its money supply. The resulting fall in demand would reduce imports and the lowering of prices would boost exports; thus the deficit would be rectified. Any country experiencing inflation would lose gold and therefore would have a decrease in the amount of money available to spend. This decrease in the amount of money would act to reduce the inflationary pressure.

Supplementing the use of gold in this period was the British pound. Based on the dominant British economy, the pound became a reserve, transaction, and intervention currency. But the pound was not up to the challenge of serving as the primary world currency, given the weakness of the British economy after the Second World War.

The architects of Bretton Woods had conceived of a system wherein exchange rate stability was a prime goal. Yet, in an era of more activist economic policy, governments did not seriously consider permanently fixed rates on the model of the classical gold standard of the 19th century. Gold production was not even sufficient to meet the demands of growing international trade and investment. Further, a sizable share of the world's known gold reserves were located in the Soviet Union , which would later emerge as a Cold War rival to the United States and Western Europe. The only currency strong enough to meet the rising demands for international currency transactions was the U.

The strength of the U. In fact, the dollar was even better than gold: The rules further sought to encourage an open system by committing members to the convertibility of their respective currencies into other currencies and to free trade. What emerged was the " pegged rate " currency regime. In theory, the reserve currency would be the bancor a World Currency Unit that was never implemented , suggested by John Maynard Keynes; however, the United States objected and their request was granted, making the "reserve currency" the U.

This meant that other countries would peg their currencies to the U. Meanwhile, to bolster confidence in the dollar, the U. At this rate, foreign governments and central banks could exchange dollars for gold. Bretton Woods established a system of payments based on the dollar, which defined all currencies in relation to the dollar, itself convertible into gold, and above all, "as good as gold" for trade. As the world's key currency, most international transactions were denominated in U. Additionally, all European nations that had been involved in World War II were highly in debt and transferred large amounts of gold into the United States, a fact that contributed to the supremacy of the United States.

A major point of common ground at the Conference was the goal to avoid a recurrence of the closed markets and economic warfare that had characterized the s. Thus, negotiators at Bretton Woods also agreed that there was a need for an institutional forum for international cooperation on monetary matters. Already in the British economist John Maynard Keynes emphasized "the importance of rule-based regimes to stabilize business expectations"—something he accepted in the Bretton Woods system of fixed exchange rates. Currency troubles in the interwar years, it was felt, had been greatly exacerbated by the absence of any established procedure or machinery for intergovernmental consultation.

As a result of the establishment of agreed upon structures and rules of international economic interaction, conflict over economic issues was minimized, and the significance of the economic aspect of international relations seemed to recede. Officially established on 27 December , when the 29 participating countries at the conference of Bretton Woods signed its Articles of Agreement, the IMF was to be the keeper of the rules and the main instrument of public international management.

The Fund commenced its financial operations on 1 March It advised countries on policies affecting the monetary system and lent reserve currencies to nations that had incurred balance of payment debts. The big question at the Bretton Woods conference with respect to the institution that would emerge as the IMF was the issue of future access to international liquidity and whether that source should be akin to a world central bank able to create new reserves at will or a more limited borrowing mechanism. Although attended by 44 nations, discussions at the conference were dominated by two rival plans developed by the United States and Britain.

As the chief international economist at the U. Treasury in —44, Harry Dexter White drafted the U. Overall, White's scheme tended to favor incentives designed to create price stability within the world's economies, while Keynes wanted a system that encouraged economic growth. The "collective agreement was an enormous international undertaking" that took two years prior of the conference to prepare for—it consisted of numerous bilateral and multilateral meetings to reach common ground on what policies would make up the Bretton Woods system. At the time, gaps between the White and Keynes plans seemed enormous.

White basically wanted a fund to reverse destabilizing flows of financial capital automatically. White proposed a new monetary institution called the Stabilization Fund that "would be funded with a finite pool of national currencies and gold… that would effectively limit the supply of reserve credit". Keynes wanted incentives for the U.

We, the delegates of this Conference, Mr President, have been trying to accomplish something very difficult to accomplish. Keynes' proposals would have established a world reserve currency which he thought might be called " bancor " administered by a central bank vested with the possibility of creating money and with the authority to take actions on a much larger scale.

In the case of balance of payments imbalances, Keynes recommended that both debtors and creditors should change their policies. As outlined by Keynes, countries with payment surpluses should increase their imports from the deficit countries, build factories in debtor nations, or donate to them—and thereby create a foreign trade equilibrium. But the United States, as a likely creditor nation, and eager to take on the role of the world's economic powerhouse, used White's plan but targeted many of Keynes's concerns.

White saw a role for global intervention in an imbalance only when it was caused by currency speculation. Although a compromise was reached on some points, because of the overwhelming economic and military power of the United States the participants at Bretton Woods largely agreed on White's plan. What emerged largely reflected U. The Fund was charged with managing various nations' trade deficits so that they would not produce currency devaluations that would trigger a decline in imports.

The IMF is provided with a fund composed of contributions from member countries in gold and their own currencies. When joining the IMF, members are assigned " quotas " that reflect their relative economic power—and, as a sort of credit deposit, are obliged to pay a "subscription" of an amount commensurate with the quota. Quota subscriptions form the largest source of money at the IMF's disposal. The IMF set out to use this money to grant loans to member countries with financial difficulties.

If this sum should be insufficient, each nation in the system is also able to request loans for foreign currency. In the event of a deficit in the current account , Fund members, when short of reserves, would be able to borrow foreign currency in amounts determined by the size of its quota. In other words, the higher the country's contribution was, the higher the sum of money it could borrow from the IMF.

Members were required to pay back debts within a period of 18 months to five years. In turn, the IMF embarked on setting up rules and procedures to keep a country from going too deeply into debt year after year. The Fund would exercise "surveillance" over other economies for the U. Treasury in return for its loans to prop up national currencies. IMF loans were not comparable to loans issued by a conventional credit institution. Instead, they were effectively a chance to purchase a foreign currency with gold or the member's national currency. The IMF was designed to advance credits to countries with balance of payments deficits.

Short-run balance of payment difficulties would be overcome by IMF loans, which would facilitate stable currency exchange rates. This flexibility meant a member state would not have to induce a depression to cut its national income down to such a low level that its imports would finally fall within its means. Thus, countries were to be spared the need to resort to the classical medicine of deflating themselves into drastic unemployment when faced with chronic balance of payments deficits. The IMF sought to provide for occasional discontinuous exchange-rate adjustments changing a member's par value by international agreement.

This tended to restore equilibrium in their trade by expanding their exports and contracting imports. This would be allowed only if there was a fundamental disequilibrium. A decrease in the value of a country's money was called a devaluation, while an increase in the value of the country's money was called a revaluation.

It was envisioned that these changes in exchange rates would be quite rare. However, the concept of fundamental disequilibrium, though key to the operation of the par value system, was never defined in detail. Never before had international monetary cooperation been attempted on a permanent institutional basis. Even more groundbreaking was the decision to allocate voting rights among governments, not on a one-state one-vote basis, but rather in proportion to quotas.

Since the United States was contributing the most, U. It regularly exchanged personnel with the U. Truman named White as its first U. Since no Deputy Managing Director post had yet been created, White served occasionally as Acting Managing Director and generally played a highly influential role during the IMF's first year. The agreement made no provisions to create international reserves. It assumed new gold production would be sufficient. In the event of structural disequilibria , it expected that there would be national solutions, for example, an adjustment in the value of the currency or an improvement by other means of a country's competitive position.

The IMF was left with few means, however, to encourage such national solutions. Economists and other planners recognized in that the new system could only commence after a return to normality following the disruption of World War II. It was expected that after a brief transition period of no more than five years, the international economy would recover and the system would enter into operation. To promote growth of world trade and finance postwar reconstruction of Europe, the planners at Bretton Woods created another institution, the International Bank for Reconstruction and Development IBRD , which is one of five agencies that make up the World Bank Group, and is perhaps now the most important agency [of the World Bank Group].

The IBRD was to be a specialized agency of the United Nations, charged with making loans for economic development purposes. The Bretton Woods arrangements were largely adhered to and ratified by the participating governments. It was expected that national monetary reserves, supplemented with necessary IMF credits, would finance any temporary balance of payments disequilibria. But this did not prove sufficient to get Europe out of its conundrum. Postwar world capitalism suffered from a huge dollar shortage.

The United States was running huge balance of trade surpluses, and the U. It was necessary to reverse this flow. Even though all nations wanted to buy U. In other words, the United States would have to reverse the imbalances in global wealth by running a balance of trade deficit, financed by an outflow of U. Recall that speculative investment was discouraged by the Bretton Woods agreement.

Navigation menu

Importing from other nations was not appealing in the s, because U. So, multinational corporations and global aid that originated from the U. The modest credit facilities of the IMF were clearly insufficient to deal with Western Europe's huge balance of payments deficits. The problem was further aggravated by the reaffirmation by the IMF Board of Governors in the provision in the Bretton Woods Articles of Agreement that the IMF could make loans only for current account deficits and not for capital and reconstruction purposes.

In addition, because the only available market for IBRD bonds was the conservative Wall Street banking market, the IBRD was forced to adopt a conservative lending policy, granting loans only when repayment was assured. Given these problems, by the IMF and the IBRD themselves were admitting that they could not deal with the international monetary system's economic problems. The United States set up the European Recovery Program Marshall Plan to provide large-scale financial and economic aid for rebuilding Europe largely through grants rather than loans. Countries belonging to the Soviet bloc, e.

Secretary of State George Marshall stated:. The breakdown of the business structure of Europe during the war was complete. From until , the U. Dollars flowed out through various U. Greek and Turkish regimes, which were struggling to suppress communist revolution, aid to various pro-U. To encourage long-term adjustment, the United States promoted European and Japanese trade competitiveness.

Currency Convertibility and the Exchange Rate System : Finance & Development, September

Policies for economic controls on the defeated former Axis countries were scrapped. Aid to Europe and Japan was designed to rebuild productivity and export capacity. In the long run it was expected that such European and Japanese recovery would benefit the United States by widening markets for U. In , Roosevelt and Churchill prepared the postwar era by negotiating with Joseph Stalin at Yalta about respective zones of influence; this same year Germany was divided into four occupation zones Soviet, American, British, and French.

In the past, the reasons why the Soviet Union chose not to subscribe to the articles by December have been the subject of speculation. But since the release of relevant Soviet archives, it is now clear that the Soviet calculation was based on the behavior of the parties that had actually expressed their assent to the Bretton Woods Agreements. Facing the Soviet Union, whose power had also strengthened and whose territorial influence had expanded, the U. The rise of the postwar U. Despite the economic effort imposed by such a policy, being at the center of the international market gave the U.

A trade surplus made it easier to keep armies abroad and to invest outside the U. The dollar continued to function as a compass to guide the health of the world economy, and exporting to the U. This arrangement came to be referred to as the Pax Americana , in analogy to the Pax Britannica of the late 19th century and the Pax Romana of the first. As world trade increased rapidly through the s, the size of the gold base increased by only a few percentage points.

In , the U. More drastic measures were proposed, but not acted upon. However, with a mounting recession that began in , this response alone was not sustainable. The design of the Bretton Woods System was that nations could only enforce gold convertibility on the anchor currency—the United States' dollar.

Gold convertibility enforcement was not required, but instead, allowed. Nations could forgo converting dollars to gold, and instead hold dollars. Rather than full convertibility, it provided a fixed price for sales between central banks. However, there was still an open gold market. The greater the gap between free market gold prices and central bank gold prices, the greater the temptation to deal with internal economic issues by buying gold at the Bretton Woods price and selling it on the open market. In Robert Triffin , Belgian American economist, noticed that holding dollars was more valuable than gold because constant U.

What would later come to be known as Triffin's Dilemma was predicted when Triffin noted that if the U. But incurring such payment deficits also meant that, over time, the deficits would erode confidence in the dollar as the reserve currency created instability. The first effort was the creation of the London Gold Pool on 1 November between eight nations. The theory behind the pool was that spikes in the free market price of gold, set by the morning gold fix in London, could be controlled by having a pool of gold to sell on the open market, that would then be recovered when the price of gold dropped.

The Kennedy administration drafted a radical change of the tax system to spur more production capacity and thus encourage exports. In , there was an attack on the pound and a run on gold in the sterling area , and on 18 November , the British government was forced to devalue the pound. President Lyndon Baines Johnson was faced with a brutal choice, either institute protectionist measures, including travel taxes, export subsidies and slashing the budget—or accept the risk of a "run on gold" and the dollar.

He believed that the priorities of the United States were correct, and, although there were internal tensions in the Western alliance, that turning away from open trade would be more costly, economically and politically, than it was worth: While West Germany agreed not to purchase gold from the U. In January Johnson imposed a series of measures designed to end gold outflow, and to increase U.

This was unsuccessful, however, as in mid-March a dollar run on gold ensued through the free market in London, the London Gold Pool was dissolved first by the institution of ad hoc UK bank holidays at the request of the U. This was followed by a full closure of the London gold market, also at the request of the U. All attempts to maintain the peg collapsed in November , and a new policy program attempted to convert the Bretton Woods system into an enforcement mechanism of floating the gold peg, which would be set by either fiat policy or by a restriction to honor foreign accounts.

In the s and s, important structural changes eventually led to the breakdown of international monetary management. One change was the development of a high level of monetary interdependence. The stage was set for monetary interdependence by the return to convertibility of the Western European currencies at the end of and of the Japanese yen in Convertibility facilitated the vast expansion of international financial transactions, which deepened monetary interdependence.

Another aspect of the internationalization of banking has been the emergence of international banking consortia. Since various banks had formed international syndicates, and by over three quarters of the world's largest banks had become shareholders in such syndicates. Multinational banks can and do make huge international transfers of capital not only for investment purposes but also for hedging and speculating against exchange rate fluctuations.

These new forms of monetary interdependence made possible huge capital flows. During the Bretton Woods era, countries were reluctant to alter exchange rates formally even in cases of structural disequilibria. Because such changes had a direct impact on certain domestic economic groups, they came to be seen as political risks for leaders.

As a result, official exchange rates often became unrealistic in market terms, providing a virtually risk-free temptation for speculators. They could move from a weak to a strong currency hoping to reap profits when a revaluation occurred. If, however, monetary authorities managed to avoid revaluation, they could return to other currencies with no loss. The combination of risk-free speculation with the availability of huge sums was highly destabilizing. A second structural change that undermined monetary management was the decline of U.

By the mids, the E. With total reserves exceeding those of the U. The shift toward a more pluralistic distribution of economic power led to increasing dissatisfaction with the privileged role of the U. As in effect the world's central banker, the U. In an increasingly interdependent world, U.

Bretton Woods system

In addition, as long as other countries were willing to hold dollars, the U. The Soviet military threat had been an important force in cementing the U. As gross domestic production grew in European countries, trade grew. When common security tensions lessened, this loosened the transatlantic dependence on defence concerns, and allowed latent economic tensions to surface.

• 22 Cuentos Infantiles (Spanish Edition)
• The Temptation of Saint Anthony (Modern Library Classics)
• Lesbian Gangbang - Enjoying Nature
• Its Not About You: A Grandparents Guide to Surviving Divorce in the Family
• HPV and Cancer
• St. Peters Brewery
• Whipping Boy: Bent Over By The Boss #4