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Above all, growth was more evenly distributed. Internationally, differences between regional performances were limited: the real annual growth rates of GDP in the s stood at 5 percent in member countries of the Organization for Economic Cooperation and Development OECD4 percent in Latin America, and 6 percent in Asia.
Domestically, too, most countries moved toward greatly reduced inequalities of income distribution. Both these experiences present a marked contrast with the decades following. They feared that a shortage of reserves might constrain or curtail economic advance through the need to deal with balance of payments problems, and believed that counteraction was urgently required.
Such swings were bound to occur and could only be accommodated given an adequate supply of reserves. The analogy is sometimes made with a taxi stand. There needs to be a line of taxis in order to accommodate the demands of a sudden flow of passengers without causing them delays; in normal times, taxis return and fill up the stand.
This chapter traces the evolution of the reserve discussion and the attempt to produce a workable reform that would command an international consensus. The latter requirement, however, would ensure that the new instrument, the SDR or special drawing right, in practice never came to play the central role in the international system that its advocates had envisaged. Perhaps the most striking feature of the classical Bretton Woods system in retrospect appears as the expansion of international trade at a rate unparalleled either before or since.
This trade performance was correlated, at both the international and the national levels, with a very vigorous growth in output see Figures and One of the forces that propelled this development was the reduction in tariff levels for manufactured goods and the substantial elimination of quotas between industrial countries as the result of rounds of multilateral trade negotiations under Men wanting sex Bretton Woods General Agreement on Tariffs and Trade GATT.
The most impressive reductions occurred at the Men wanting sex Bretton Woods, at the Geneva Round ofand the Annecy Round ofwhen the United States negotiated bilaterally with 20 other governments. In the s, the Kennedy Round extended the negotiating process. Instead of bilateral agreements, multilateral arrangements were made; and instead of productspecific concessions, liberalization was conducted across the board. Trade growth and trade liberalization reinforced each other. Growth convinced policymakers of the concrete benefits to be obtained through liberalization, and encouraged them to take further steps, which in turn generated larger markets and further growth.
Later, the falling off of growth rates in the s helped to provoke a reversal of the progress made in trade talks, and the then, conversely, further harmed the prospects for trade. Since liberalization gives rise to a virtuous cycle, and protectionism correspondingly produces a vicious cycle, politicians, policymakers, and economists felt more and more sensitive to the possibility of a shock that might reverse the beneficent process and send the world on the disastrous downward spiral.
The longer the successes of the golden age lasted, the more nervous the participants became. Could the eventual shock come from the financial system? How far was the impressive international economic performance the result of international financial arrangements, and how far was the successful outcome simply a consequence of the chance absence of destabilizing shocks?
What is the relationship between the system and the incidence of shocks? The counterpart of trade liberalization was the adoption in Europe between and of current convertibility, and the acceptance of Article VIII of the Fund Articles of Agreement on convertibility in place of the protection offered by Article XIV. It is only at this moment that it became possible to speak of a genuine international monetary system: indeed, the phrase only entered the general vocabulary in the context of discussions in the early s regarding the creation of the General Arrangements to Borrow.
This makes the international financial system conceptually entirely different from the international political system: in the latter, states alone interact with each other, while in the former there is a large body of other agents, private as well as official, continually judging and second-guessing the decisions made by the states. Inadequate reserves would be the most frequent reason given for a refusal to open trade, or for a willingness to contemplate higher levels of protection. A monetary shock might reverse the successes of trade liberalization. Finding a solution to the reserve problem thus took on the character of a quest for stability in the system as a whole.
Unfortunately, this question touched the most sensitive political nerves.
In what had become more and more a dollar system or perhaps a dollar-sterling systemthe expansion of dollar reserves looked to many non-Americans like an extension of U. Even more frustratingly for Europeans and others, it was a costless extension: by making the rest of the world hold dollars, the United States was exchanging its paper for the goods and services of others. In order to operate smoothly, any international financial system requires three elements: liquidity, confidence, and adjustment.
Confidence allowed the augmentation of reserves through borrowing. If there were longer-term difficulties, eventually the supply of reserves and the fall-back supply of credit would be limited and the country concerned would require adjustment of its external position. The pre gold standard had generated a high degree of confidence and had operated on surprisingly low levels of reserves liquiditybut it had required the political sacrifice of painful adjustment to deflation by its members in the s and s.
After the First World War, the gold exchange standard had provided a greater degree of liquidity relative to world trade than the prewar system, but had suffered and in the end collapsed because of confidence problems.
Afterand particularly in the s, the existence of confidence allowed the delaying of adjustment, especially in the case of two major reserve centers, the United Kingdom and the United States; as a result, when adjustment was eventually required, when liquidity was exhausted and when confidence ebbed, the extent of the adjustment that would have been needed to return the system to smooth operating was too large to be acceptable to national policymakers.
If adjustment under the gold standard had been too painful, under Bretton Woods it was too delayed because of the high level of expectations about growth. The success of the Bretton Woods system actually contributed, through increasing Men wanting sex Bretton Woods, to the growing difficulties of managing the system. The postponement of the adjustment mechanism was further encouraged by the great difficulty of making the exchange rate an instrument of international economic policy. And when adjustment came to be required, init was too large to be handled in any way except by the improvised measures of crisis management.
In the first place, the expansion of international credit during the s provided a means of establishing larger reserves and of postponing adjustment. The composition of reserves changed over the course of the decade Figureand foreign exchange played a larger role, as the relative share of other reserves fell. The U. Second, confidence in the operation Men wanting sex Bretton Woods the system was increased because of the interlinking of political and economic calculations. The major industrial economies were linked not simply through economic intercourse, but also through security provisions and alliance systems.
The existence of the military and security calculation enhanced the working of the economic relationship, which otherwise would have been much more strained, between the United States and the United Kingdom, and the United States and Germany. France, the country that most vigorously challenged the principles on which the international monetary system operated, was also the state with the most hesitation about the security system and the North Atlantic Treaty Organization NATO. When the United States began to show s of political overstretch, economic confidence began to wobble also.
The development that had most facilitated the exchange liberalization at the end of the s was the international liquidity generated as a result of large U. These provided at least a temporary solution to the liquidity issue. Such a development of U. In practice, the United States did not need to draw on the Fund until a late stage in the development of the deficit problem, as other central banks held increasingly large dollar reserves.
The flow of dollars thus solved the liquidity problem and greatly eased the process of adjustment, but worried those who believed that there should be some regulation of liquidity growth. As it was, fromthe world began to face a new dilemma. It was sometimes put in this form: the U. If, on the other hand, dollar creation ran too quickly, it would push inflation across frontiers. At least for the first half of the s, many observers believed that the major problem lay in the likelihood of U. The academic version of the Corvair thesis appeared first in the context of a criticism of international institutions for not regulating and controlling the development of world liquidity, and of a memory of the early s as a fearful precedent for what might happen if international money were left to the uncontrolled whims of the marketplace.
Failure systematically to deal with the liquidity issue would mean a resurgence of doubts about confidence. It was an argument that Triffin had begun to formulate already before and the evident end of the postwar dollar shortage in the context of a general critique of the international financial system, and also before the general transition to convertibility.
Permanently in residence in Washington, cut off from regular policy-making responsibilities in their own countries, the members of the Executive Board inevitably tend to become little more than glorified messenger boys, dependent on instructions from their home countries for all substantive matters submitted to the Board. This does not create an effective forum for negotiation. It would endanger the establishment of convertibility from the outset. A repetition of would be the inescapable outcome of such an approach: the moment when claims on a key currency such as sterling would be realized, the available liquidity would be exceeded, and in consequence a worldwide rapid deflationary contraction would be induced.
Short-term dollar and sterling liabilities to foreigners … are now about twice as large as total gold holdings outside the United States and the United Kingdom … Their partial conversion into gold, in the event of renewed currency fears, could easily wreck sterling convertibility and might even create serious, although still manageable, financial problems for the United States itself.
This gloomy prognosis about the likely consequences of convertibility required only little modification after the introduction of general convertibility between and ; in its modified version of a diagnosis of a general liquidity shortage it came by the mids to command nearly universal consensus. In such a crisis, the fundamental problem of liquidity shortage would re-emerge. This view was elaborated in two articles published by Triffin in and then in as a book.
Over this period the system was subtly changing: in the first place, because of the emergence of new surplus countries, Germany and then later Japan. The United Kingdom and the United States—the principal reserve countries—found their situations increasingly difficult and needed to resort to expedients, devices, gimmicks, and ad hocery in order to maintain their international position.
The international monetary system began to require a degree of management that no one had foreseen. By the late s, the system was lurching from one crisis to the next, and the realities of power politics seemed to frustrate any attempts at a systemic reform. The sharp deterioration of the U. Per Jacobsson, and many Europeans, interpreted deficits as the result of uncontrolled domestic inflationary pressure in the United States. For the first half of the next decade, however, the U. In fact, the trade balance gave no indication whatsoever of any sustained shift in the international structure of comparative costs.
The two major sources of concern were the government sector and private capital flows. The Men wanting sex Bretton Woods of the U. The international monetary system performed well here in compensating for national idiosyncrasies. In Europe and elsewhere, there was a substantial demand for long-term capital, but investors were used to maintaining short-term and Men wanting sex Bretton Woods s.
In the United States, on the other hand, a broad public was accustomed to investing long term at fixed interest rates. The flows of the early s thus reflected different liquidity preferences. This development contained the danger of a Triffinite collapse.
A change in the gold parity of the dollar would be one way of accomplishing this. The chief economist of the Bank for International Settlements BISMilton Gilbert, continually tried to press behind the scenes for a change in the dollar price of gold, but this option never seemed very realistic. Arthur Schlesinger, Jr. He had acquired somewhere, perhaps from his father, the belief that a nation was only as strong as the value of its currency.
President carried across the Atlantic, Kennedy announced that he would not alter the gold price. Chapter 4 has already described how before this statement, the U. Instead of parity alterations, let alone a systemic reform to tackle the balance of payments problem, the United States adopted a series of essentially technical devices to minimize the extent of disturbance caused by U. The United States followed a of strategies for the defense of the dollar.
All involved moving responsibility for the management of the international monetary system away from the IMF. As the dollar problem became ever more acute, the United States increasingly felt impelled to act on its own and outside the mechanism provided by the system. The Gold Pool. At the beginning of the decade, there had been substantial volatility on the international gold market.
The fixed price of gold relative to national currencies, combined with a gradual price inflation, made gold look cheaper and led to greater gold use for artistic and industrial purposes. A potential undervaluation of gold then led speculators to test the market. Over the weekend of October 15,it became clear that John F. Kennedy was very likely to be elected as President of the United States, and many Europeans believed that this would mean an American inflation promoted by expansionist Keynesian economists.
On October 20, after the opening of American markets, the London gold price went far above the U. The panic demonstrated to central banks and governments the need to intervene in disorderly markets. This situation was managed very differently to the similar problem in the late s. At that time, after an increased demand by gold hoarders in response to inflationary threats, the IMF had used its leverage to discourage the sale of gold at premium prices. It had been able to act quite effectively, in part because the largest Western gold producer, South Africa, had had payments problems and required Fund support.
In the early s, however, the problem was tackled in another fashion: not through the IMF, but through market operations conducted by the central banks of the major European countries and of the United States. The participants agreed not to buy gold in the London market, or from the major gold producers the U. The Swap Network. It allowed the central banks to function collectively and very effectively as an emergency lender of last resort.
The swap network inaugurated by the Federal Reserve Bank of New York revived in a straightforward way the day-to-day collaboration maintained in the s between Governors Strong and Norman. It established a pre-arranged volume of short-term credits between central banks, which might be used to counter destabilizing market movements for instance, if the pound was weakening against the dollar, the Federal Reserve would provide the Bank of England with dollars for a support operation.
But crises have a tendency to spin out of control; and it was possible to envisage situations arising in which the resources of the central bank swap network would be inadequate. In addition, the United States tried to induce other countries to take action to support the U. It was also expected that countries that benefited from U.
When, for instance, Germany ed NATO inand established a new army, it bought its supplies almost entirely from the United States. As military sales slowed down after the Bundeswehr reached full size, the United States created substitutes for military sales. Afterthe United States asked countries in which a substantial amount of U.Men wanting sex Bretton Woods
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