Judging Economic Policy by Richard J Sweeney

Author:Richard J Sweeney [Sweeney, Richard J]
Language: eng
Format: epub
Tags: History, General
ISBN: 9780429723643
Google: s_0-EAAAQBAJ
Publisher: Routledge
Published: 2021-11-28T02:48:04+00:00

5

International Monetary Issues

DOI: 10.4324/9780429046858-5

The International Monetary System

The Present International. Monetary System in Historical. Perspective1

From the Gold Standard to Bretton Woods. It is important to recognize the present system as the last stage of a continuous, or perhaps discontinuous, evolution from the gold standard to widespread managed floating via the Bretton Woods par value system. Under the gold standard, exchange rates were fixed and could be changed only in extreme circumstances--a rigidity which had disastrous consequences in the 1930s.2 The major functional innovation of Bretton Woods was that the par value system provided for orderly changes of exchange rates in case of a “fundamental disequilibrium.” The new system worked well during the first twenty years or so. During this period there were many exchange rate changes, almost all of them depreciations vis-à-vis gold and the dollar. The world recovered rapidly from the ravages of the war, trade barriers and payment restrictions were gradually reduced, and more and more currencies became convertible into each other. As a consequence, world trade grew by leaps and bounds, and the whole world, developed as well as developing countries, enjoyed a period of almost unprecedented growth and prosperity.

From Bretton Woods to Widespread Floating. In the mid-1960s the par value system developed troubles. Currency crises became more numerous and violent and followed each other at shorter intervals. The British pound was the first major currency that was involved. Later the dollar came under suspicion and unwanted dollar balances piled up abroad. Convertibility of the dollar into gold was “suspended” on August 15, 1971. The dollar floated down until it was devalued in terms of most currencies in the Smithsonian Agreement in December 1971. After another devaluation of the dollar early in 1973, widespread though managed floating of all major currencies began in march 1973.

The main reason for the breakdown of the Bretton Woods par value system was a basic defect in the IMF charter which made the system unfit to cope with the exceptional strains and stresses that developed in the late 1960s and early 1970s.3 This defect was that the method of occasional, discontinuous, and therefore large changes in exchange rates, the adjustable or jumping peg, opened the floodgate for disruptive speculation. Under this system, the speculators speculated against the central banks whose hands were tied because they had to support the par value of the currency. This makes speculation easy and almost riskless. Under the system of continuous floating, on the other hand, speculators speculate against each other and against the market which is a much more risky business.4

But why did this basic defect not show up earlier? In retrospect the explanation is not difficult. During the early years after the war, when the economies of Europe and Japan were prostrate from war destruction and exhaustion, U.S. industries enjoyed a quasi-monopoly position, and, later, foreign countries eagerly accumulated dollar balances to rebuild their international reserves. Generous U.S. foreign aid financed large deficits, and tight controls in many countries suppressed remaining imbalances. Domestic supply shortages and extensive rationing in many countries made exchange rate adjustments appear of little use.

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